Another Fed Rate Cut Next Month?

The past two days have seen CNBC's on-air staff going typically nuts discussing the possibility of a rate cut at the next Fed meeting.

Yestday morning, Rick Santelli, CNBC's Chicago Merc-based reporter, shared an opinion with Brian Wesbury that another Fed cut won't fix real credit problems.

In the midst of an argument with the as-always clueless, usually wrong Steve Liesman, Santelli correctly blurted out that financial concerns are now 'worries over collateral,' not rate levels.

After a few more rounds with Liesman, Santelli chuckled something like,

'You ought to try making a living trading,'

implying that Liesman dreams up all sorts of interpretations for interest rate moves, without understanding the basics of what drives futures traders in the Chicago pits.

Today, the two were at it again, with Liesman crying,

'It's not just some Wal-Mart we're talking about here, Rick, it's our banking system. The lifeblood of our economy.'

But, is it? Are our banks' solvencies truly at risk? And, if so, will they become solvent by another Fed rate cut?

Personally, I am with Wesbury and Santelli on this one. I doubt that our banks are actually insolvent. I hate writing this, but if you consider where most have gotten into trouble, it's been in the newer securities areas where they were forbidden to play until...ah...yes.....Sandy Weill, late of Citigroup.....broke through Glass-Steagal and pushed commercial banks into underwriting and trading equities.

As my old boss, Chase Chief Planning Officer, Gerry Weiss, used to say,

'We don't need to break down Glass-Steagal. We lose enough money through bad management as it is now. All that will happen with the removal of that regulation is that we'll lose even more in new ways.'

Sure enough, BofA and Citi have posted most of their recent losses in securities-related efforts.

Which means that the original banking activities which we associate with institutions that access DDA accounts- deposit-taking, trust, custody, funds transfers and processing- are still intact.

What's changed over the years is the commoditization of so many of the lending businesses to which commercial banks used to turn for profits- consumer, business, credit cards and mortgage loans. It's routinely these areas which cause problems for banks, as they stretch their own risk appetites in pursuit of further growth. Compared to ten or twenty years ago, banks don't have nearly the choke hold on credit markets that they once did.

The bedrock financial systems of our country, however, remain intact and, if necessary, separable from institutions which lend to excess.

Thus, Liesman overreacts when he believes that some bad sub-prime loans, which account for something like 15% of the 15% of the mortgage loans outstanding, will sink our entire financial system.

It's not the bad loans, but, as Santelli noted, fear by counterparties of overpriced collateral.

The sooner we know that suspect loans have been written down, the sooner the commercial banks will be capable of returning to what loan business they still handle.