Bloomberg News reports that hedge fund Bridgewater Associates has estimated that the total write-downs from the current credit crisis will total $1.6 trillion. With $400 billion in write-downs taken so far, this $1.6 trillion estimate would put us about a quarter of the way through the crisis. So far, banks have raised $321 billion in capital to buffer those write-downs.

And Teddy Forstmann, a private equity veteran, agrees with this assessment. In an interview from Saturday's Wall Street Journal, he said the current credit crisis is the worst he's seen. As he said, the problem started after 9/11 with the Fed giving away money at negative real interest rates. This created so much cash that banks could not find ways to lend it out where risk and reward were in balance.

So they created new ones which mis-priced risk. These include loan syndication -- in which banks originate loans and take a fee for selling them to someone else -- and securitization -- in which banks packages lots of loans as securities and sell those to hedge funds and other institutional investors. Unfortunately, these only work when the prices of the underlying assets are going up.

Things are not working out so well for those at the Fed who deny that inflation exists. After all, its job is to keep the currency strong by putting out brush fires of inflationary expectations before they can become a firestorm of price spike fears. And if current consumers' expectations of inflation are any measure, the Fed is not doing its job.

That's according to the Associated Press, which reports that 90% of those it polled expect ballooning costs to squeeze them financially over the next half-year. Consumers have less money than they used to -- the median income is down since 2000 from $61,000 to $60,500. And prices have risen -- food has tripled in many cases and gasoline prices are up to around $4.20 a gallon. But the Fed does not see this -- it measures inflation excluding food and fuel -- and has kept rates at 2%.

And with housing in the tank and lenders in trouble, they can't borrow their way to balancing their budgets. Since the Fed is not controlling inflation, people are coping by cutting back. They are driving less, easing off the air conditioning and heating at home and cutting corners elsewhere. Half are curtailing vacation plans; nearly as many are considering buying cars that burn less gas.

When the Carlyle Group got its start in the late 1980s, the founders leveraged their extensive political backgrounds. It was certainly smart as the private equity firm struck some key deals (especially in the defense area).

Well, Carlyle is using its political savvy once again. This time, the firm wants to take advantage of the distressed valuations in the banking sector.

Basically, there is a complex set of regulations that make it extremely difficult for private equity firms to invest in banks. For example, there is an equity cap of 25% (which is often lower if the private equity firm wants more control).

So, in the Wall Street Journal, the Carlyle Managing Directors, Olivier Sarkozy and Randal Quarles, weighed in with an opinion piece.

The essential argument: the regulations are outmoded.

In fact, the rules may make our financial system weaker since there is tougher access to much-needed capital. After all, it seems that every day there is another bank that needs huge amounts of capital.

No doubt, Carlyle is being self-serving, and it will probably make a fortune from the regulatory changes.

At the same time, capitalism can be a powerful tool, and as a result, move things in the right direction. With $400 billion available in the coffers of private equity funds, this could be a big help to repair the big problems in the banking sector.

Interestingly enough, the issue appears to have some traction. According to a recent Wall Street Journal story, it looks like the Federal Reserve is thinking about relaxing some of the rules.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.

The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.

Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Are the days of wine, roses and interest rate cuts over? The answer for now seems yes.

In a statement released today, the Federal Open Market Committee said it decided to keep its target for the federal funds rate at 2% because data indicates that labor markets have soften further and financial markets remain under stress. Moreover, the credit crunch, the lousy housing market and rising energy prices are "likely to weigh on economic growth for the next few quarters." No kidding.

The FOMC's decision, which comes amid growing fears about the outlook for inflation, should not have come as a shock to investors. Federal Reserve Chairman Ben Bernanke and other top bankers have hinted for months that the days of wine, roses and interest rate cuts would be coming to an end. In fact, the market seemed to have already absorbed the market. The major stock market averages barely budged after the announcement was issued.

TheStreet.com's Jim Cramer says a do-nothing Fed signs the death certificate of the banks.

Time for the inflation hawks to recognize the stakes. Throughout the discussion as articulated in the papers and on TV, you hear of only two things with regard to the Fed, that the fundamentals are sound enough to stop cutting and that inflation worries command a shift to higher rates.

In the interest of understanding what has been happening in this market -- an unrelenting decline in all but the oil and fertilizer stocks since the Fed floated this stance -- you have to get your arms around the idea that this is it, an obituary, for all of the banks that need housing prices to increase and bad loans to decrease. Because despite the sound and quite cerebral approach the hawks are taking, unless we get a giant FHA bill out of Congress, you can pretty much be assured that most of the big banks in this country will be so radically under-reserved when they report that we might as well just give up on them.

How about that bill? It seems suddenly likely and it is important, I am not denying it. If we could get the FHA to have $300 billion in lending capacity and we agree that the FHA is basically going to have to take a beating, than you can make a case that we are only about a year away from a turn -- that was the tenor of the CSFB housing upgrade story yesterday, although it didn't rely on the FHA much at all in its prognostications.

The June Philadelphia Fed Manufacturing Index came in at -17.1 which was substantially below the -10.0 number forecasted and the -15.6 number from the previous month. This number seems to overshadow the better-than-expected Leading Indicators number of 0.1% released from the Conference board and the Initial Claims number of 381,000, which was better than previous number of 386, 000.

These numbers indicate that even though the country may be able to avoid entering a recession this year, the economy is still in a very fragile state. It may be stabilizing but shows no indication of any major improvement.

The housing downturn will continue to act as a major overhang on the economy. High oil prices continue to act as a tax on the consumer in the short term.

Although the Federal Reserve will probably not lower interest rates again in the near future unless a crisis occurs, the economic numbers above indicate that it is no position to raise rates in the near future despite inflationary pressures. The risk of sending the economy into a recession is too great. In addition, any rate increases unless they were quite substantial are unlikely to cure inflation.

In the battle between inflation and the economy, it's still the economy that rules!

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed ® to Investment Success: the Effortless Strategy for Beating Wall. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston's 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he said, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."

The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates may be raised as early as the end of this year. But as I have stated previously in my book, Follow the Fed to Investment Success, "Watch what the Fed does, not what it says."

This speech reminds me of the famous "irrational exuberance" speech by then Chairman Alan Greenspan in late 1996. Greenspan said that "irrational exuberance" had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.

However, the Fed did not raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, almost five years later.

Fed Chairman Ben Bernanke was in Massachusetts on Monday, speaking at a conference, according to this article. As you can imagine, he had some things to say about the economy. Believe it or not, they were actually encouraging, and it should cause many to feel at least a little more comfortable, even though the world appears to be ending thanks to really expensive oil futures. In fact, if Bernanke is to be believed, we don't have a lot to worry about.

Well, we do have to worry about a few things, but Bernanke believes that a "substantial downfall" in the economy is not as guaranteed as recent market action has suggested. I'm not sure if he's correct about this. With gas prices hitting a record of an average $4 per gallon, the psychological fallout is going to be immense. Add to that the recent employment data, and the economy seems to have found a wonderful recipe for disaster. But what I like about Bernanke's comments is that they too can hold psychological sway. He believes that the net outlook isn't any worse than before, and many observers suspect that he is done lowering rates. While some might look upon that stance as a harbinger of positive tidings, I think we have to remember that Bernanke's hands are tied right now, and that he has been put in a damned-if-you-do-damned-if-you-don't scenario. If he drops rates any further, then the dollar becomes less valuable on a global basis and inflation becomes increasingly problematic. If he pauses, then what about growth? It all goes back to oil and the dreaded specter of stagflation.

TheStreet.com's Jim Cramer says constant vacillations and inconsistent messages have conspired to extend this crisis.

There was a reason to go ballistic. The financial system was falling apart because of bad loans that have since been magnified by huge leverage and dubious dividends.

And here we are, more than a year into the crisis, and the Federal Reserve and Treasury still refuse to admit the obvious, despite hideous data every day -- yesterday Lehman (NYSE: LEH) (Cramer's Take) and Washington Mutual (NYSE: WM) (Cramer's Take), today UBS (NYSE: UBS) (Cramer's Take) -- that something has to give. We are either going to be worried about a housing recession or worried about inflation. We cannot be worried about both. Because of this half-in/half-out viewpoint, we have continually failed to address either problem.

Last year was the year to cut and cut big to get refinancings done and allow banks to build capital by playing the yield curve, a la 1990. They blew that. They were worried about inflation. This year you either have to take a severe recession and just crush American business so it uses less energy and crush the American homeowner so he can't pay and then merge all of the banks, or you say we are going to solve the recession/housing conundrum first and address the inflation we can address: ethanol-based food inflation. You cannot do both! You have to take them sequentially.

I've been very wary of market conditions over the last six months. I've taken the bear position for better than a year now. Today however, I am seeing a convergence of conditions and circumstances that lead me to question whether the gates have again been thrown open for the bulls. Make no mistake about my position on the economy from a consumer standpoint. It's real ugly out there and I'm not too happy about that. However, I've seen it worse in my time and for now, we still live in a world where good hard work and some personal responsibility can accomplish a lot for a person.

There are several things that I now find promising for the investment world. First, the answer to the question of the Democratic presidential nominee is all but cemented. That's one big monkey off the nation's back. Second, the Federal Reserve has subtly come out in favor of protecting the dollar. I do understand more now about why the Reserve Board took the path that it did, but I still think that interest rates need to come back up a little. Third, our nation has shown that it can indeed reduce it's driving habit in short order. Fourth, manufacturing numbers have not declined as quickly or as deeply as I expected. Finally, I think the downward slide of real estate values is slowing and shall soon stabilize, but there are still a lot of mortgage notes yet to crumble.

I know that the stock markets and the overall economy are inextricably connected, I also know that they are two very distinct worlds. That is why I feel that the markets could surge while things at the consumer level still look very grim.

If the price of crude oil can be reduced and stabilized, if we can reverse the downward trend in employment, and if this country's citizens can repay their debts rather than defaulting on them, I see a bull market on the horizon. What do you think? Should we aim the DJIA upward again?

Gary Sattler is a freelance blogger. He spent most of his economic stimulus check on a much needed new refrigerator.

Despite Fed Chair Ben Bernanke's comments this week about inflation, the dollar is dropping -- which is fueling higher oil prices. And the reason for that relates to the different strategies of the Fed and European central banks for fighting inflation.

The difference? The Fed talks about inflation but keeps its interest rate at 2%. If Bernanke was serious about fighting inflation, he'd raise rates. Meanwhile, the New York Times reports that two European central banks -- which set their rates at 4% (European Central Bank (ECB)) and 5% (Bank of England) -- are talking about raising the rates further because they're "alarmed by soaring prices for food and fuel." The ECB thinks May inflation was 3.6% and it expects a 3.4% price rise for all of 2008.

The dollar has lost 70% of its value since January 2001 -- it's dropped from 92 cents to the Euro down to $1.56. Now if you're an investor, would you rather get a 4% return or a 2% one? That's the simple choice faced by people trying to decide whether to buy Euros or Dollars. And with the ECB on track to raise interest rates next month, the dollar is likely to fall further behind unless Bernanke puts the Fed Funds rate where his mouth is.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Bloomberg News reports that Ben Bernanke's talk about not cutting interest rates is strengthening the dollar. The result is that speculators are covering their short positions on the dollar and dumping their long commodity trades. These moves are causing crude oil, sugar and copper prices to tumble.

All I can say is -- fantastic! As I've posted, a weak dollar has boosted commodity prices and a strong one would reverse the tide of rising commodity inflation. These rising prices have squeezed consumers, whose spending accounts for 70% of GDP growth. If Bernanke's talk about putting a halt to interest rate cuts continues to strengthen the dollar, commodity prices could fall further.

In cutting interest rates from 5.25% to 2%, Bernanke has contributed to a rapid rise in commodity prices. But the accumulating evidence of building inflationary expectations has him returning the Fed to its roots as the defender of the dollar. Paul Krugman's weak defense of Bernanke's pro-inflationary policies appears to have marked their end.

Let's hope Bernanke will back up his strong dollar talk with a rise in interest rates.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Ever had too much to drink and been cut off by a bartender? Federal Reserve Chairman Ben Bernanke did the same thing to the U.S. economy today, and investors reacted as if they had been denied their favorite alcoholic beverage, angrily sending the stock market tumbling.

In a speech today to the International Monetary Conference in Barcelona, Bernanke pointed out that the Fed has "eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. . . . For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely."

Bernanke also expressed concerns about the weak U.S. dollar, which has helped boost the earnings of some large multi-national companies. The Fed is "attentive" to the implications of the declining greenback for inflation and inflation expectations. In other words, investors expecting yet another Fed interest rate cut should not hold their breaths. Bernanke is going to close the candy store sooner rather than later.

But unfortunately for investors, this news came amid growing worries that Lehman Brothers Inc. (NYSE: LEH) may report its first quarter loss and raise billions in new capital. This comes a day after Wachovia Corp. (NYSE: WB) ousted its chief executive Ken Thompson. Shares of Merrill Lynch & Co. (NYSE: MER), Morgan Stanley (NYSE: MS) and Bank of America Corp. (NYSE: BAC) also tumbled.

This really may be the last call for lower interest rates for a while. A bartender realizes that drunks will keep buying as many drinks as they pour. But the benefits of increasing the bar's bottom line are outweighed by the dangers caused by an intoxicated person getting behind the wheel of a car. The same tough love is being applied to investors and though it may be painful at first, it's the right thing to do in the long run.

Reuters reports that consumer confidence has hit a 28-year low. That should not come as a surprise. After all, between 2000 and 2007 the median income has dropped from $61,000 to $60,500. But prices have skyrocketed. And with growth slowing -- the prospect of layoffs looms large while consumers expect prices to keep rising.

There is something called the Federal Reserve. And it's supposed to keep those inflationary expectations under control by raising interest rates to strengthen the currency and keep credit use from going haywire. But the Fed got confused. It thought that by cutting rates from 5.25% to 2%, it could revive a frozen credit market without boosting inflation. Whoops! Now the credit markets remain frozen but actual inflation and expectations for future inflation are both skyrocketing.