Barack Obama has been elected 44th president of the United States and he's not to take office until January 20, 2009. Yet the economy is in a bad shape now and needs immediate action -- even if President-elect Obama and sitting President Bush may not see eye to eye when it comes to the steps needed to heal the economy. That may put Obama in an awkward position for a while, but I hope he won't be deterred.

Obama has two months to name a cabinet and surround himself with experts. He also has enough time to figure out which of the issues on his economic agenda will be tackled first. Most will require government spending at a time the country already runs unprecedented deficits. Is it the $25 billion State Growth Fund, or the $25 billion in a Jobs and Growth Fund? Is it the $500-$1000 tax credit and shifting the burden of taxes back to the rich (which would cost $115-175 billion)? Is it the $150 billion investment in clean energy to create jobs? Other than these issues, he also said he would work on undoing some of the deregulation that brought the U.S. to this messy state.

And of course, we've just scratched the surface. What about health care? What about the myriad of other issues Obama will face when taking office, including war.

For now, he can mostly just prepare himself. He may be able to pass a bill in Congress, but he should take this time to prepare and prioritize. Americans will expect him to stick to his agenda. He may appease interest groups on occasion to create unity, but let's hope he can do this and still jumpstart the economy so that the recession is as painless as possible and growth is sustainable for years to come.

Day after day the media reports on the "reasons" that the market is moving up or down. Nobody seems to challenge these reports even though they are often patently bogus. And since the reports seem to change every day, we just get used to the idea that nobody offers a real explanation of daily market movements. So just like we simply have to accept that our portfolios are worth 40% less than they were last October, we have to accept that nobody will bail us out or even explain why the market moves up or down every day.

Yesterday, for example, there were two "explanations" offered -- both of which are silly. One was that investors were buying stocks yesterday in anticipation of a Fed rate cut, the other that investors were snapping up bargains. Yet just a little analysis suggests that both "explanations" are probably wrong. The Fed rate cut explanation makes no sense because the market has been anticipating a 50 basis point cut since last week -- if this was news why didn't the market rise last week?

The other -- that investors were snapping up bargains -- is also shaky. That's because a lower stock price does not necessarily mean that the stock is a bargain. Investors must evaluate a stock based on its price in relation to some measure of value -- such as its earnings growth or its net worth. But most analysts agree that 2009 earnings projections are not worth the paper they're written on. Some anticipate that earnings will decline 35% or more next year so P/E ratios are meaningless. And for many companies -- particularly those holding asset-backed securities -- net worth as stated on their books is a fiction that does not reflect the diminished value of this toxic waste.

As has happened so many times in the last several weeks, the global markets have plunged while Americans slept. But the reason for the plunge seems elusive. Articles suggest that stock prices fall due to negative economic news. But such explanations imply that investors are surprised to learn this. And I question whether any intelligent person would be surprised to see evidence of a shrinking global economy and bad earnings.

Here's this morning's carnage. Asian markets were down more than those in Europe which have not been open as long as of this writing.The Nikkei 225 index fell 9.6% -- linked by analysts to Sony's announcement of a lower earnings forecast, Korea's Kospi (down over 50% this year) tumbled 10.6% -- attributed to Samsung's 44% earnings decline; and the Hang Seng lost 8.3%. Meanwhile Europe's major exchanges are down roughly 9%.

With the Dow set to open as low as trading limits allow -- 550 points lower, I find it striking that both the dollar -- at $1.2595 to the Euro -- and the yen -- at 92.61 yen to the dollar -- are rising in value in relation to other world currencies. Since oil is traded in dollars -- this currency strength should offset the impact of OPEC's decision to cut production by 1.5 million barrels a day. So far this theory is working -- the oil price dropped $4 a barrel after the announcement. (It couldn't happen to a nicer bunch of people.)

It looks like Ben Bernanke is getting under the Wall Street Journal's skin. That's because Rupert's Rag is not happy with the direction of its candidate for President. And it is annoyed that a Republican appointee, Ben Bernanke, is helping out the Democratic candidate -- Barack Obama. That's what prompted the Journal's headline -- Bernanke endorses Obama.

Oh poor Wall Street Journal! Is this the best you can do? Why does it bother you so much that Ben Bernanke is supporting Obama's call for a new stimulus package? In an October 13th speech, Obama "urged Congress to act 'as soon as possible' before the Bush administration leaves office on January 20 to pass a stimulus measure. If Congress and the president didn't act 'it will be one of the first things I do as president of the United States.'" says Bloomberg News.

But Rupert's Rag is in the tank for McCain and although Obama is already setting U.S. policy on big issues -- a few months ago, Iraq and Bush agreed with Obama's Iraq withdrawal plan -- the Journal is upset that Bernanke and ultimately Bush will go along with Obama's proposed stimulus plan as well. First Colin Powell, and now Ben Bernanke are reading the tea leaves and choosing to position themselves for power in the next administration.

And the Journal is finally waking up to the fact that it will be on the outs for at least the next four years.

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

The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.

I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.

And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.

Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG shares and has no financial interest in the other securities mentioned.

Another shoe is dropping in the ongoing credit collapse here in this nation of whiners. According to the New York Times, the default rate on so-called Leveraged Loans -- (a very strange name if you ask me since a loan is leverage) that refers to loans used to finance corporate takeovers -- climbed fast from 0.24% in August 2007 to 3.3% in August 2008.

The loans that have gone bad so far are not big ones -- they are more like the canary in the coal mine -- hinting at bigger problems to come. The Times says, "the loans that have gone bad have been concentrated in two industries - real estate and auto parts. S.& P. calculates that they have accounted for almost half of this year's defaults. Gambling has also had problems, as it turns out that there are too many casinos in some places."

The biggest loans have yet to default. But their collapse is inevitable. That's because banks are scrambling to raise capital and shore up their balance sheets. And the leveraged loans were structured to benefit from a lending market in which the name of the game was to keep from losing market share by making it ever easier to borrow. Thus the terms of leveraged loans were easy -- featuring, as the Times reported, a "flood of 'covenant-lite' and 'toggle-[Payment in Kind] PIK' loans."

The latest balance sheet of the Federal Reserve makes me wonder whether it's solvent. That's because its balance sheet has clearly deteriorated in the last year. And with $40 billion in capital, that deterioration could take a big bite out of the Fed's capital.

Unfortunately, I do not know enough about how the Fed gets its capital or how it accounts for the value of its assets and liabilities to be able to do more than raise questions. But here are three things that concern me:

• Declining asset quality. The total value of the U.S. Treasury securities on the Fed's balance sheet declined by $312 billion between July 2007 and this July -- a 43% drop in this highest quality asset.
• Increase in shakier assets. During this same period, the balance in Term Auction Facilities -- the credit line that investment banks are using to get their shakier assets -- such as Collateralized Debt Obligations (CDOs) off their balance sheets --increased from $0 to $150 billion. Another $29 billion in assets come from Maiden Lane, LLC -- the entity created for the Fed to take on the toxic waste that sank Bear Stearns.
• High leverage. While the Fed has more capital backing up its assets than the typical investment bank -- which holds $1 of capital for every $32 in assets -- the Fed is still highly leveraged -- with only $1 of capital for every $23 of assets -- it borrows the rest. Put another way, if the Fed was forced to account for its balance sheet on a mark-to-market basis, a mere 4.5% decline in the value of the Fed's assets would wipe out its capital.

These observations raise questions in my mind:

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.

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.

It seems that the Fed just got done cutting rates. Now, it may want to raise them. Inflation appears to be getting bad enough so the the agency could need to up interest rates to keep prices from overheating. According to Reuters, "Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation." And, the FT writes,"A sell-off in the US bond market pushed the yield on 10-year Treasuries above 4 percent on Wednesday for the first time since January, as investors bet that pressure from record oil prices would force the Federal Reserve to raise interest rates this year."

In other words, two different papers using two sets of reasoning to come to the same conclusion. Great minds thinking in the same direction but coming at it from different points of view. In all probability so many smart people are probably not wrong.

But, what about that recession? If credit is tight and housing markets continue to fail, where is the relief for consumers? Their spending did drive the economy for half a decade. If they do not return to their old habits, how does the foundation of a recovery get built?

The answer may not be very attractive. Inflation may be cut down by Fed increases, and the lack of credit may drive the economy further into a deep downturn.

It may be as simple as realizing that both problems cannot be fixed at once.

Douglas A. McIntyre is an editor at 247wallst.com.

Many people are saying that the rise in oil prices is the result of loose monetary policy. They say that there is an easy solution to the problem. Raise interest rates substantially, and the problem will be solved. Since the rise in oil is also the primary cause of rising inflation, the inflation problem will be resolved as well.

There are several problems with this line of reasoning. Oil continued to rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has the some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Then, there are the big questions. Why are oil prices rising? What is the short-term solution?

I believe that the main reason for the rise in oil prices is the rise of the developing world. The two nine hundred pound gorillas in this equation are India and China. Automobile demand is increasing in these countries and is likely to continue in the near future.

This is similar to the rise in oil prices in the late 1960's and early 1970's. After World War II, the United States was the primary industrial power. As the world industrialized, demand for oil increased. The United States was not the only nation driving cars extensively. Supply constraints were also introduced in the mid to late 1970's with the Arab oil embargo and the Iranian revolution.

The Fed's job is to control inflation. But is was established originally to keep financial panics from getting out of control. Since last August, it has reverted to its original role and failed miserably. Since it began cutting its Fed Funds rate 57% from 5.25% to 2.25% the price of a barrel of oil has risen 62% from $71 to $115. Simply put, the weaker the dollar, the higher the price of oil. Bloomberg News proves it -- noting that in the last year, there was a 0.96 correlation -- a correlation of 1.0 would be a completely safe bet -- between the Euro-dollar exchange rate and the price of oil.

If it bothers you to pay $3.66 for a gallon of gasoline you can thank the Fed along with cheerleader, Hank Paulson who brags that he's been talking about the U.S.'s strong dollar policy consistently. Of course saying and doing are two different things. Since January 2001, the dollar has lost 70% to the Euro. And since oil is traded in dollars, a drop in the dollar leads to a rise in price. And lower interest rates erode further the value of the dollar since it pays government bond holders a lower rate of return so they sell the U.S. currency and buy higher yielding ones.

But it's unfair to give the Fed all the blame. After all, we have been running the Federal budget at a deficit -- expected to hit $413 billion this year. Since the Fed has started cutting rates, other factors such as speculation by leveraged traders -- relying on the 0.96 correlation -- and political instability seem to have remained at the same level -- although the degree of speculation seems difficult to measure. And U.S. demand has declined due to the economic slowdown. So it looks like those dollar-weakening rate cuts are the one factor powerful enough to offset the demand slowdown to drive prices up.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Any investor looking to the Fed to bail out current credit problems is looking at part of the answer. The Fed can only do so much. It can lower interest rates. It can add money to the economy. But that isn't going to be enough to cure all the bad mortgages or delinquent credit card payments. And if the Fed adds too much money to the economy, it feeds inflation. The Fed needs help from Congress and the President and mostly business, particularly the banks and thrifts that made the loans.

Here's the essence of the problem: even if rates go much lower, if people don't have jobs, they won't borrow money because they don't have the means to pay it back. Furthermore, banks won't lend money to the unemployed or underemployed. They've already done that. That's why we're in this mess. And they should be the ones to pay for it, not taxpayers. The lenders need to face these problems squarely and take the necessary measures to work them out.

Reuters reports that jobless claims jumped to their highest level since 2005. Specifically, U.S. workers applying for unemployment benefit rose by 38,000 last week, posting the highest reading since September 2005. I guess Fed Chairman Ben Bernanke had the statistics on his side when he testified that "It now appears likely that real gross domestic product [GDP] will not grow much, if at all, over the first half of 2008 and could even contract slightly."

The key is how the statistics performed relative to expectations. The 407,000 jobless claims reported in the week ended March 29 was way above economists' estimates of 370,000. If consumers lose their jobs, they'll have even more trouble borrowing to pay their rising costs of living. Although government statistics hide it -- anyone who drives or buys food knows that prices are rising.

Bloomberg News reports that job losses are coming from homebuilders and housing-related businesses, including lenders and financial service companies with exposure to mortgage-backed securities, are also stepping up firings. It also quotes an analyst who said, "400,000 is usually a trigger point when we consider recessionary times." I credit Bernanke for knowing a bit more about what's going on -- unlike the President who was shocked to learn about $4 a gallon gas. .

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

BusinessWeek reports that the $29 billion "loan" that the Fed is making to finance JPMorgan Chase & Co. (NYSE: JPM)'s $1.2 billion acquisition of The Bear Stearns Companies (NYSE: BSC) is really an equity investment in $30 billion worth of mortgage-backed securities (MBSs).

If that investment goes sour, taxpayers will suffer. I think we deserve to know more of the details of those MBSs before the deal closes. For instance, what would a buyer be willing to pay for those MBSs in the open market? If the answer is 10 cents on the dollar, why should taxpayers be on the hook for the losses?

To do the deal, a Delaware-based limited liability company (LLC) will receive the $30 billion worth of Bear MBSs. The Fed will "lend" $29 billion to that company, which will pass all the money along to JPMorgan. JPMorgan will contribute a $1 billion loan to the LLC and BlackRock ­Financial Management will pay back the LLC's loans by gradually liquidating the assets. The Fed gets paid back fully before JPMorgan gets back anything on its loan. And if, after JPMorgan gets paid back, there's money left, the Fed gets it all.