I wonder if Ben Bernanke will ask for do overs on the FOMC meeting yesterday. Whatever reaction he expected from the inaction and statement of continuing belief in the future moderation of inflation (a belief that at this point is akin to the belief in unicorns) I’m guessing it wasn’t a near 400 point sell off in the stock market, a dollar mugging, a $30+ spike in gold and a record close in the price of crude. And I wonder if Richard Fisher is telling his fellow FOMCers I told you so today. Fisher dissented for a hike in rates, apparently the sole remaining sane member of the panel.

The stock market is going down for a variety of reasons, from idiotic talk about banning speculation in oil markets (don’t the morons in Congress know that oil speculators can short oil too?) to the never ending list of taxes Obama plans to raise, but the Fed head in the sand routine about the dollar and inflation just pushed things over the edge today. Public policy, whether from the coin clippers at the Fed or the do anything to get re-elected reconstituted populists of Congress, has I think reached a nadir of superficiality.

Would it really make any difference whatsoever to the economy if the Fed funds rate were 2.25% rather than 2%? While they certainly don’t need any help in their never ending search for bankruptcy court, I suspect the banks would have weathered the storm of a symbolic hike in rates. They aren’t lending anyway; what difference does it make? The Fed had an opportunity to lend actual support to the dollar rather than the empty rhetoric of the Ben and Hank show and they blew it. A symbolic rate hike and some timely intervention in the currency market could have done wonders for the dollar with the added benefit of deflating the oil bubble. It was so obvious that like the bugaloo, it plumb evaded them (to quote that other famous Buffet, Jimmy).

So what now? Has the Fed ever convened an emergency meeting to raise interest rates? The next meeting isn’t until August and at the current rate of rise, oil will be more precious than a room full of babies and puppies by then. In a recent commentary I said if the price of oil didn’t fall soon, I’d have to change my outlook for the economy. That point is rapidly approaching. The sad thing is it didn’t have to be this way. The economy is not great but the market is working as it should. Housing prices are falling back to reality and while it’s not a good time to be in the mortgage business, the rest of the economy is still chugging, if a few cylinders shy of a V-8. Letting the housing correction run its course would have been painful but a lot less damaging than this hair of the dog treatment that the Fed has administered.

Bernanke has managed to find the inverse sweet spot of the economy – too much inflation and not enough growth. Congress has blamed everyone from oil companies to speculators (and the newly discovered “index” speculators) to the tooth fairy for high oil prices while the architect of this economic conflagration fiddles away with interest rates 2% below the vastly understated official inflation rate. A mirror might also be a useful tool in Congress’ investigative tool box. The price of oil will not be reduced by continuing a 27 year concerted effort not to find any more. Paying farmers to convert tortillas to gas is having the predictable effect on tortilla prices too.

Senator Obama called for a new “stimulus” package today and while I never want to discourage a politician from sending my money back, this economy will not be healed by another trip to the mall. The Fed cannot manufacture a recovery by manipulating the interest rate lever when consumers don’t want to borrow and banks don’t want to lend. If cheap credit isn’t the answer to a problem caused by cheap credit, maybe, just maybe we should try something else. If you’re in a hole the size of the Grand Canyon, for the love of God, stop digging and start filling.

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