It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There’s even a growing recognition that a recession is over the horizon.

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In your opinion, what will this relapse do to mortgage markets?

It’s likely to get bloodier this year and into the next — many more lenders will go out of business. I’d expect to see wholesale and correspondent lending practically disappear, especially in non-conforming marketplace. Retail origination will take center stage as lenders retreat to a channel they feel they can better control. And that will accelerate job losses in the mortgage sector.

Many companies that survived this first wave will catch their breath just in time to be hit again — and many won’t be ready for it. Others, like Countrywide, know what’s coming — the question is whether they’ve done enough to be able to ride it out.

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With the economy increasingly looking like it will slow down materially in the last half of the year, there is a drum beat for the Federal Reserve to cut rates. But how likely is a rate cut this year? We take a very different look at inflation to see if there is any room for the Fed to give a boost to the economy. We look over our shoulder at Japan and the yen carry trade and ask a heretical question: does the Fed cutting rates make any difference?

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