It wasn’t quite the Valentine’s Day massacre but US Federal Reserve chairman Ben Bernanke won’t be getting many roses or chocolates for his small dose of reality before the US Senate finance committee today. He quite plainly laid out the Fed’s expectations that the US economy will get worse before it gets better and that the Fed would continue cutting interest rates to revive the economy.

Normally those comments would have brought a flood of flowers from investors anxious to look through the bad news for the upside. Instead Wall Street fell, with major indices down by more than 1%: the Dow was off 175 points and the sentiment soured as the day went on after Bernanke appeared on Capitol Hill at 10am (Washington time).

Mr Bernanke said the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Central banks don’t cut interest rates at the rate the Fed has to help healthy economies that have sound credit markets and banks. America’s are very unsound at the moment. He acknowledged how tough it was in the economy from the still expanding impact of the subprime mortgage crisis and credit crunch.

In December, Bernanke and the Fed were caught by a surprise slump in activity and a worsening in the credit crunch, and then in January he cut rates by 0.75% between Fed meetings after world markets had fallen sharply in late January, and then followed up with another 0.50% cut in the Federal Funds rate. So far the Fed and Mr Bernanke have given the impression of scrambling to catch up, much like our Reserve Bank at the moment.

The cause of the problem: the health of the imploding US housing industry was there for all to see today.

The US real estate agents industry group, the National Association of Realtors, said that in the December quarter, US home prices had their biggest ever quarterly fall since the association started collecting records in 1979.

The national median price drop of 5.8%, to $US206,200 from $US219,300, (it is not an average, it is a median) was the steepest ever recorded and Association officials blamed the liquidity squeeze that began last summer for much of the drop. Home buyers had trouble obtaining mortgage financing, especially for more expensive properties.

Each of the four US real estate regions recorded losses compared with the fourth quarter of 2006. The West took the worst hit, at 8.7%. Prices dropped 4.8% in the Northeast, 5.4% in the South and 3.2% in the Midwest. But it is not a uniform collapse in prices: 73 of the 151 US real estate markets enjoyed price gains.

Florida, Southern California, Nevada, Ohio, Michigan, Illinois, parts of Texas, Utah and New Mexico, are the major problem areas.

Peter Fray

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