The problem is a lot of people bought more house than they could afford at over the top prices. They opted for the ARM loans or interest only loans, many planning to flip these houses. Then when the market crashed, so did the equity and everything else. They also forgot that with big houses come big heating, cooling costs and big electricily bills.

 

Who is "them"? Fannie Mae and Freddie Mac were there with the feds behind them. If we go down that route again, I might join the people predicting another depression.

The "fixes" are doing more damage than the problems themselves. We're trying to correct for people who got overleveraged by... getting the country even more overleveraged.

I would much rather face a year-long painful correction than take baby steps toward becoming a Cold War version of Estonia. You can make whatever expedient moves seem the least painful right now, but no bureaucrat can decide when the bottom has been reached and no bureaucrat can decide which interest rate will entice investment. We'll reach both of those points eventually. I would suggest that sooner is better than later. These bandaids will just keep the albatross around our necks for years instead of months.

 

Then why do we even have the Fed set interest rates?

 

To manage inflation. A quarter point one way or the other on the overnight rate isn't going to have a practical effect on investors. It sends a signal regarding the overall trends in the economy, as seen by the Federal Reserve Board. That's why Wall Street always reacts immediately.

 

So wouldn't it be safe to say that fixing this problem would manage deflation?

 

You replied before I had a chance to expand on my answer, but this is the point where you and I agree to disagree. You seem to see what is being done as a fix. I don't. I see it as a smoke and mirrors way to avoid the underlying issues.

 

IMHO, the underlying issues are already being taken care of, both by the government and the market.

 

As soon as countries like China, Japan, Saudi Arabia, quit buying our debt, then it is a whole new ballgame for America. A hard slap back to reality. Forget any health care plan from Washington, forget Social Security, forget any tax cuts. And above all: Forget cheap credit.
The housing "crisis" will drag on well into 2009 probably into 2010. Seems the current administration, is asleep as usual, they need to get the RTC back up and moving again, finding a orderly way to dipose of the properties the government will soon own. A orderly disposal might help stabilize prices somewhat at the low end, then prices can again rise.
Problem is going to be finding "qualified" buyers. There are millions that "want" a home, but far fewer that can actually "afford" a home at today's prices, and have to qualify for a "real" or "traditional" mortgage.

 

Runaway spending... more being promised.
$53 trillion in unfunded entitlements... more being promised.
Chicoms owning our debt... looks like they're in line to take Washington Mutual.
Energy supplies not keeping up with demand... let's spend $150 billion on nonexistent technologies and hope for the best.
Unemployment is a concern... let's extend unemployment benefits ad infinitum and make being out of work a little more comfortable.
Investment in corporate America is slowing... let's keep the second highest tax rate in the world.
Government mandates created the worst liquidity crunch in decades... let's add a few more layers of mandates.
Financial firms need to be unwinding all of their excess leverage... let's tell them to hang on till the end and hope for a bailout instead.
Two New England residents in charge of certain committees have stood directly in the way of reforming Fannie Mae and Freddie Mac, for reasons that seem obvious to me... let's cling to a pathetic obsession with the outgoing President.
Millions of people are overextended with debt... let's pretend that it's not their fault.

Oh hell, I could go on for a while here, but I think I'm going to drive for a while. Like I said, we agree to disagree. I think that we, as a nation, are too content to buy into half-assed platitudes from the people who are causing most of the problems. As long as they say they "feel our pain," we smile and feel a little better about our days. Each step along the way, we get a little weaker as a nation and a little more socialist as a society. And nothing in my little diatribe above is being fixed.

 

Runaway spending is correct, notice neither candidate nor their party has suggested getting back to a "balanced budget" type scenario. Of course they aren't really saying balance the budget at all, what they mean, is they have cut the "rate of growth" of the deficit. Smoke and mirrors.
The coporations that actually pay coporate taxes, (1/3) pay on the average 17%. Foreign owned corporations in the US, pay a average 20% less than US corporations. This according to the recent GAO report.
Employment is a huge concern, as more companies relocate to brutal 3rd world dictatorships for cheap labor, the number of "decent" or "middle class" jobs is drying up. Middle class jobs that could buy a home currently or soon to be owned by the gov't. (ie:taxpayers) Even without the gov't unemployment numbers being manipulated, what they don't count is the number of "under employed" people.
Iraq is costing $3 billion a month, maybe more by now.
Congress, with heavy lobbying and payoffs from pharmacuetical companies, medical supply companies, the AMA and AHA, refuse to institute "competitive bidding" on Medicare/Medicaid, the largest socialized medical plan in the world. (excluding China one would assume.)
Financial companies taking huge risks on UNregualted derivitives. One person (Warren Buffet?) described derivitives as "weapons of mass financial destruction."
Seems he was correct and the high dollar Wall Street "free market" execs were wrong.
There was a new group of Republican financial wizards in the early and mid 80's that thought up "supply side" and also, the theory that the US, with it's dynamic economy could allow massive amounts gov't deficit spending over periods of time and not harm the overall stability of the economy or the gov'ts ability to repay. But that was 25 years ago before we allowed 12 million or so American jobs to leave the country. Our economy is now not so dynamic, but Congress keeps spending the money unfettered. The national debt has almost doubled in the last 8 years. Now at a reported staggering amount of $9.6 TRILLION.
Our whole economy is now is seemingly based on deficit spending, both gov't and personel. Want to stimulate the economy? Open the treasury in Washington and send out more credit cards to consumers. Worry about paying it back at a later date.
While all will return to some form of normalcy in the future, there may be some rough road ahead.