Free money for everyone… forever.

The Fed’s 75-point cut yesterday makes history on two counts. At a “range” of 0-0.25%, the Fed’s rate hasn’t been this low in half a century — and they have never set a range to their target lending rates.

But that wasn’t all. In a monetary version of “shock and awe” policymaking, the Fed threw “all available tools” at the crisis. Other groundbreaking details include:

• An assurance that the nearly nonexistent rate will stay low “for some time”
• Confirmation that the Fed’s $600 billion mortgage-backed security and agency debt repurchase program will roll out “over the next few quarters”
• A hint at the FOMC’s interest in purchasing longer-term Treasury securities
• Promises that the Fed “will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

“This announcement,” Dan Amoss wrote to his readers, “convinced the markets that the Fed will inflate as much as necessary to stave off deflation. I expect the Fed to work even closer with the Treasury Dept. under the Obama administration. This may include a major mortgage refinancing initiative in 2009. A hint of such an initiative could spark an extension of the stock market rally that began in late November.

“This radical new dollar debasement will not come without consequences; expect further gains in the price of precious metals.”

In anticipation of this “shock and awe” rate decision, Dan helped his Strategic Short Report readers take 245% profits just hours before the Fed’s announcement yesterday. How about you? Learn more here.

Nearly all stocks soared after the Fed’s press release. Expecting a 50-point cut and far less aggressive policy implementation, traders went all in. The Dow rose 4.2%. The Nasdaq and S&P 500 jumped even higher.

Banks, of all freaking things, led the way… now that they can get their money for nothing and their chicks for free. If Greenspan’s 1% rates following the tech bust begat a bubble the size and scale of the housing mess — just imagine what mayhem a few quarters of 0-0.25% rates will do. Oy.

At least… that’s what we suspect the Fed was thinking.

This morning, it looks like the rate cut buzz has already worn off… the Dow opened down 80 points.

“The Federal Reserve wants us to believe,” opines GoldMoney’s James Turk , “that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in one of solvency. Most banks and many consumers and companies are overextended, and their precarious financial position cannot be put right with newly created dollars.

“Many loans were made recklessly and imprudently, and the borrowers as well as the lenders are suffering the consequences. Low interest rates and easy money will not make economic those houses built on speculation, those shopping malls built unnecessarily and those companies whose business models rested upon ill-founded assumptions about the health of the U.S. economy. The debts of imprudent borrowers cannot be repaid in a timely way because they own assets acquired in the boom that with the benefit of hindsight are uneconomic even with zero interest rates.

“What’s needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today’s America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.

“History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so.”

The U.S. dollar has been falling all week. After a big step down Monday, the dollar got slammed again yesterday following the Fed’s cut. Roll the videotape:

The dollar index has fallen about 1 point every day over the past five… huge moves for the typically sluggish index. This morning, the index is once again battling with 80.

The euro soared after the Fed’s announcement, up a full 5 cents, to $1.41. The pound rose 2 cents, to $1.54.

And the yen found itself a new 13-year high at 88. And why not? Now that lending rates in I.O.U.S.A. are essentially the same as in Japan, what’s to stop the dollar from becoming the new carry trade currency of choice?

(BTW, we’re working on another way for you to profit from the falling dollar… we’ll fill you in Friday.)

But the good news… gold. Our favorite metal is up again today, to around $850.

Oil didn’t get much of a kick from the dollar’s fall yesterday. The front-month crude contract stayed put at $44. Even after OPEC announced they would cut back production twice as much as expected this morning, oil fell. It’s around $41 as we write.

Still, it looks like the bottom may be in for gas prices. The national average price at the pump has been inching up all week, to now $1.66.

50% of American companies are currently planning on reducing labor costs, says a recent survey by human resources firm Hewitt Associates. Companies that tell Hewitt they will be cutting back say the average pay raise for 2009 will be less than 3%… the lowest average hike in the study’s 32-year history. Of all industries, auto-related workers can expect the worst raises — about 1.4%, the survey said. Those in construction and engineering will do best, averaging a 4.5% bump.

So how can you come out on top? Hewitt reports that business will be probably focus on performance-based rewards next year. 69% of companies polled offer incentive-based pay, while 24% say they’ll add such plans next year.

Facing a $15 billion budget gap, New York Gov. David Patterson called for 88 new fees and taxes in his newly revised state budget. Included in this reform are new taxes on movie tickets, taxis, soda, beer, wine, massages and cigars. All kinds of motor vehicle licensing, registration and ticketing fees will rise… there’s even an “iTunes tax” that will nickel and dime “digitally delivered entertainment services.”

“We’ve made too many promises and asked for too few sacrifices,” said Patterson. “We’re going to have to change our culture as we know it.”

Whoa, David… you want to tone it down a bit? This is America. Home of the brave. Land of the free (and easy credit).

So the former chairman of Nasdaq bilked investors of $50 billion dollars… what’s the big deal?

The sum pales in comparison to the unfunded liabilities of the government. And at the very least, “investors” had a choice whether to give him their money or not.

Uh-oh… keep this off Capitol Hill, too: According to a USA Today survey, 67% of potential car buyers would consider buying GM, even if it entered bankruptcy. The newspaper’s poll (in conjunction with Gallup) flies in the face of the data we hear touted by congressional Democrats almost daily… 80% of their respondents said they wouldn’t buy from a bankrupt auto biz.

“I don’t think,” writes a reader, “the results we have seen so far in this downturn are anywhere near as bad as they are going to get. My partner and I have been traveling quite a bit recently, including three weeks in India, and we have found Fortune 100 companies for the most part all acting the same way worldwide. No new hires. No raises. No bonuses, no parties, no kickoffs. Basically, battening down the hatches. This is going to have a huge impact on all the service- and support-related industries — conventions, party planning, hotels, advertising, etc. And once the fallout from the bad retail Q4 sales kicks in, bankruptcies, etc., commercial real estate bubble will be caving in.

“There really isn’t going to be anywhere to hide. All the industries that have been fueled by the easy-credit binge are going to be seriously effected, and quite a few will go by the wayside. It is the companies that have strong balance sheets and CASH that are willing to invest in themselves and keep their heads down and grind out their particular value that will survive and, once we come out the other side — and we will — flourish. Innovation and value are the keys to survival.”

“Thanks for the snapshot,” writes another, “of the govt. income statement and balance sheet . Love the quirky accounting. I would suggest, however, that all is not as bad as it seems. I am a commercial banker by trade and enjoy the ‘hidden value’ analysis often used by Chris Mayer when making his recommendations.

“Although it in no way excuses the ridiculous spending spree our government has undertaken, I would venture to say that the asset side of our balance sheet is seriously understated. There is probably enough ‘hidden equity’ in the good ole USA to offset the negative equity position shown. Again, not trying to justify what is happening, but instead of being ‘really ugly,’ it’s just ‘ugly.’”

The 5: We’d like to agree with you, but wonder what — and whose — assets you might be referring to. Who is “our” in your assertion?

The quirky accounting, by the way, comes compliments of the U.S. Treasury.

“This CBS News 60 Minutes segment ,” writes a reader, “does a really good job of explaining some of the mortgage problems that wait for us in our very near future. You guys should include a link to this in The 5 Min. Forecast. They state that the worst has yet to come, but still contend stocks are a great buy right now. I would be interested to hear your comments on this.

The 5’s comment: They’ve got 60 whole minutes to forecast, and that’s the best they can do? We commented on this Credit Suisse data in May and again in June.

Source: Fed “Shock & Awe,” What 0% Means, 2008 Pay Raises, Controversial Auto Survey and More!

A U.S. Securities and Exchange Commission investigation into credit-rating companies found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

A 10-month review of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings found analysts contributed to fee discussions and weighed losing clients over certain ratings, the Washington-based SEC said in a report released today. Employees also cast doubt on the quality of some ratings, the SEC said, declining to link firms to specific findings.

“We uncovered serious shortcomings at these firms,” SEC Chairman Christopher Cox said today at a news conference. “When there were not enough staff to do the job right, the firms sometimes cut corners.”

Pension and money-market funds bought AAA-rated securities backed by mortgages to the riskiest borrowers because they offered higher returns than government bonds with the same ratings. In many cases, credit raters were paid by investment banks selling the bonds, prompting regulators and lawmakers to question their independence.

The SEC report describes an e-mail in which an analyst refers to the market for collateralized debt obligations as a “monster.”

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” said the e-mail, which was sent Dec. 15, 2006, to another analyst at the same firm.

Mike Burnick at Sovereign Society says,

A look inside one of these [subprime mortgage] bonds tells a frightening tale. A US$80 billion sub-prime asset-backed bond issued by Deutsche Bank in 2005 is still rated AAA by S&P and Moody’s. Yet, 18% of the mortgage loans in the security are in foreclosure.

Additionally, lenders have already seized 15% of the properties underlying the loan values for this security. Another 10% have been delinquent for more than 90-days.

Another Morgan Stanley Capital sub-prime mortgage-backed security has credit support of 64% relative to the number of delinquent mortgages loans in the pool. But the credit should be at least twice the delinquent mortgages to maintain a top rating.

Why This Junk Isn’t Rated As “Junk”

Technically, much of this so-called triple-A rated debt should have been downgraded long ago. So why hasn’t it? The simple answer is: Fear of too much “collateral damage.”

According to Bloomberg, “Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value.”

There’s a huge potential “contagion” effect that would ripple through the financial system if Moody’s or Standard and Poor’s dared to downgrade these shaky sub-prime credits across the board. For instance, a bank holding US$100 million of AAA-rated sub-prime bonds needs just US$1.6 million in capital backing such a highly rated credit. – that’s a lot of leverage. And such leverage is fine, as long as the bonds remain triple-A rated.

Should the bonds get downgraded to below investment grade however, under global accounting rules, a bank must put up additional capital. In fact, it would take US$16 million in capital to back US$100 million in non-investment grade bonds.

That’s 10 times as much capital required in the event of a credit ratings downgrade. Wall Street just doesn’t have that kind of extra capital lying around. Bear Stearns found this out the hard way over the weekend. That’s why I expect the major ratings agencies, perhaps abetted by the Treasury Department and the Fed, to continue covering-up the true health of US$650 billion in outstanding sub-prime bonds.

Burnick concludes that:

At the risk of sounding like an alarmist, I just have one question. What happens to confidence in the U.S. financial system (not to mention the dollar) when people wake up and realize these fairy tale markets (held up by fantasy ratings) turn into a nightmare?

The Fed is merely monetizing Wall Street’s mistakes yet again, while leaving future generations of taxpayers with an even bigger tab to settle, and higher future inflation to fight.

But there’s just no time for such ponderings now, we’re in the midst of a full-blown financial crisis after all. Damn the financial torpedoes, full speed ahead with the monetary printing press.