Last week, there was lots of new evidence of a recession brewing in the U.S. More banks failed, Chrysler ended all lease financing, and housing statistics turned even uglier. Many financial stocks were on the way up again, but after a rough Thursday we saw the massive short covering rally in financial stocks flame out. Banks experienced their biggest one-day loss in eight years, proving that the trouble in financials is far from over.

This credit crisis has real impact on the average American. I spent four days in Southern California last week, and folks told me they are extremely worried about falling home prices and the recent failure of IndyMac Bank. Mortgage rates are now rising again, so the hope of refinancing homes is fading fast. The latest bank failure on Friday hit close to home for me, when the First National Bank of Nevada in my hometown of Reno had its charter revoked. The First Heritage Bank of Newport Beach, California, also was shut down, and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver of both banks. In Reno, like much of California, the housing market remains very weak. The First National Bank of Nevada is basically a victim of poor mortgage lending. In Washoe County, which includes Reno and Incline Village in Lake Tahoe, the total homes in foreclosure jumped 186% in the past year!

The precarious state of the economy was also evident in the Fed's latest Beige Book, which was released last Wednesday. All 12 Fed districts reported that prices were "elevated or increasing." This was the worst Beige Book report on inflation in decades. While overall wages were soft, workers in some areas were demanding wage adjustments to supplement the higher cost of living. This is the first evidence that workers are beginning to demand higher wages, despite the precarious job market. The Beige Book survey used the word "grim" quite often, when describing various regional economies.

Since the Beige Book will guide the Fed on its interest-rate decision next week, I don't think the Fed will raise rates despite the urging of inflation hawks. The economy clearly needs all the help it can get. But if the Fed leaves rates alone, the dollar could fall and drive up inflation even more.