Ben Bernanke, the Federal Reserve Chairman, has the solution for the home-mortgage financial crisis. From the Associated Press, Nov. 30:
"Federal Reserve Chairman Ben Bernanke on Thursday hinted that another interest rate cut may be needed to bolster the economy. Just a day before Bernanke's speech, the Fed's No. 2 suggested the central bank may be inclined to slice rates again because of Wall Street's turbulence and the worsening problems in the housing and credit markets."
As you know, the worsening problems in the credit market are caused by the worsening problems in the housing market which are caused by the worsening problem caused by low interest rates.
Sub-prime loans are low interest loans made by the sharks of the home-mortgage financial institutions to people who don't have the money to qualify for the loan. The reason they made these loans was to keep the level of profit from the loans at the same obscene level when the prime interest rate went down to record low levels. They went after smaller prey, substituting quantity for quality.
The mortgage companies package these bad, risky, chancy, probably won't be repaid loans into bundles they call assets and rename them as CDOs, SIVs, PVCs, SUVs or something like that, to obscure the fact that they are actually not assets but are a debt that has not been repaid and is not likely to be. They sold these bad loan bundles to unsuspecting investors as assets. Then, they cranked up the interest rate on the loan to where the low interest, sub-prime, unqualified borrower defaults on the loan. The investors can't get their money out because the loans are now of no value.
The mortgage company's mortgages on these loans are pieces of paper that say, "We loaned this guy this much money that there is no way he's ever going to repay, so, what'll you give me for it?" Since the value of anything is what someone will give for it, and no one is willing to give anything for these mortgages, they're worthless, no one's buying.
The root cause of the problem is low interest rate loans. That's what got the mortgage companies making more unqualified loans in the first place.
Now comes Ben Bernanke with the solution to the problem caused by low interest rates. His solution? Why, obviously, the best thing to do is lower the interest rate, again.
This is like the carpenter who said that he didn't understand why, when he'd cut the board off twice, it was still too short.