It's hard to argue that we should shed too many tears over the various factions that are arguing for rate cuts so that they don't get hurt too badly. The extent to which, in particular, the home building and mortgage businesses bet on the proposition that what goes up won't come down makes you yearn for market justice in its usual form.

The problem, though, is that that particular form of justice will whack potentially millions of people who did nothing particular wrong and who, in fact, were being told that what they did was wonderful. I mean, of course, all of the sub-prime borrowers and others who are going to have to pay the suddenly much higher adjustable rate mortgages if interest rates stay where they are.

The truth is that many of these people are in trouble even if the Fed drops interest rates by 100 basis points between now and the end of the year. Still, a rate cut will save a lot of them and make the difference between struggling to get by and okay for a lot more (and we're talking potentially about millions of people, not a couple thousand hedge fund gurus). That's worth considering.

It's also worth considering that the Fed has seemed particularly unwilling to cut rates as the economy has seemed to lose steam. I know there were good reasons, like concerns about inflation and job and unemployment reports that suggested a recession wasn't imminent. Still, I'm not sure too many people would have bet that the Fed wouldn't lower interest rates between last July and today if you'd asked the question in, say, January. If there had been a rate cut, perhaps the mortgage and housing situations would look at bit better today.

We should reform bankruptcy reform and waive the tax penalty of foreclosure. These people need to get out from under homes they never should have bought in the first place, and get a fresh start.

NOT bailout hedge funders.

While I would re-reform bankruptcy law, too, I'm loathe to adopt a remedy that pushes people out of their homes. If nothing else, it will teach many of those who got sub-prime loans that the game is rigged against them, a lesson a lot of them already suspect might be true. If I really got to decide what would happen, I would have all of the sub-prime loans purchased at current market value and then have the payments reset to that value. That would punish the people who deserve to be punished without penalizing the folks who took out the loans. Unfortunately, that's never, ever going to happen, so I'll take lowered interest rates as a second-best option.

I'm a homeowner, paying about 55% of my monthly income on a mortgage. I know full and well just how painful a house payment is and how financial responsibility can be hard to come by. But I can't find it in my heart to help out those who took adjustable rate mortgages and sub-primes. By helping them, we are reinforcing the same problem that this government has - we are giving in to the spoiled brat who got himself into trouble and now wants out without pain. People in this country NEED to take a tumble, its the only way the country will wake up and come to understand that the house of cards our economy is built on should never have been. Fiscal responsibility doesn't come from TLC, it comes from hard lessons. Delaying the inevitable only makes it that much more painful.

Agreed with Eigenvector. Unless you are averting a disaster that will affect everyone, bailing out people who make avoidable bad decisions makes little sense. It is very sad that so many people didn't think about what they were getting into, and worse that they were goaded by unscrupulous lenders into taking unsupportable debt. But the possible consequences of a variable rate loan are within the reasonable range of things people should be responsible for knowing.

The Feds could have prevented a lot of pain cheaply, and without restraining people's choices, by requiring lenders to disclose to potential borrowers, in black and white, what could happen to loan payments under a range of interest rate movements. Delivery of this simple warning should be required by law, at a cost of around 10 cents per loan.

"It's also worth considering that the Fed has seemed particularly unwilling to cut rates as the economy has seemed to lose steam. I know there were good reasons, like concerns about inflation and job and unemployment reports that suggested a recession wasn't imminent."

Well, what about our damn creditors? I don't mean the banks, I mean the hard-working Chinese who've indirectly been funding these loans. Here you've got the US dollar at thirty-year lows, and it's a given that the dollar would fall to all-time lows once Bernanke starts cutting interest rates. How're the Chinese and Japanese gonna take that? Plus, you'd have inflation so bad that the people at the very bottom--those who couldn't afford even a shady subprime loan and must rent--would really feel it, bullshit CPI statistics aside.

"Delivery of this simple warning should be required by law, at a cost of around 10 cents per loan."

Sounds good, BUT... I bought a house about two years ago. I spent about an hour in the back room of a bank signing papers. I could have easily recieved a warning, and just ignored it. Of course, I'm doing 15 year fixed, so wasn't too worried.

It's interesting to see where people's sympathy lies. Creditors are paid interest as a reflection of the risk they're undertaken (and let me note that a lot of credit instruments have fixed interest rates, so a rate cut today won't affect them), and the principle risk they assume is that they won't get paid.

Meanwhile, yes, it's true that the people who got sub-prime loans and adjustable mortgages with ridiculous teaser rates signed all those papers and took the risks themselves. But let's be clear what will happen to many of those people (on the order of millions) if there isn't a rate cut, which is that they will lose their homes, they will lose whatever money they put into those homes and they will effectively be unable to buy new homes for a long, long time. The negative effect on the economy from that would be pretty significant.

I am aware, by the way, that one other consideration in the Fed's analysis was that lower interest rates will hurt the dollar. It is telling (and unsettling) that the dollar has dropped so much even as U.S. interest rates have climbed, because it suggests other problems that likely are difficult to address with monetary policy. (And, it's apparent, this administration is not going to address them with fiscal policy.) Still, if choosing between wiping out millions of people's finances and possibly having a cheaper dollar, I'd go with the latter.

I'm a single mom with two children who already made the tough decision of reducing my standard of living so I wouldn't have to take on a second job. Yes I had the quantity of time I wanted with my children, but I traded off a quality neighborhood. After four years in an area where drugs & violence were regular, I was ready to move. I had shaky credit that I had been working hard to repair, had a little bit of money put away & happened by a sturdy older home in a much better location. I doubted I would be approved for a loan but it wouldn't hurt to call, this was a great house & in my price range. I was approved, offers had been made & accepted, my children were insanely excited & so was I. Three days before we were to close, I get a call that there is a problem, they cannot get my original loan, however, there is another loan they can get me, my interest rate would be higher & it was fixed for only two years. They assured me refinancing in two years would be no problem, that I just needed to make all of my payments on time. Well, I said no... with the higher rate my payment was doable, but it would require tighter budgeting & yeah they could refinance in two years, as long as I made my payments on time.... When I had been late in the past, it wasn't because I wanted to be late, like it was just a choice I had made.

So, I had to inform my landlord that I wanted to take back my 30 days notice, who said ok & that he wanted to increase my rent. I had to let my children down & tell them we weren't moving & personally I felt like I'd failed.

A few months later, the company I had been with for seven years sold. I quickly found another job & was alright. However, my health insurance wasn't active yet & I had an incident that left me in the hospital for five days with a final bill in the 12k range. I called to make a payment plan with the hospital & their policy is simple, paid in full in ninety days or it goes to collections. They did suggest that I pay off as many of the bills that I can in the ninety days since there are seven different billings that will hit my credit making it worse.
With the four bills that went to collections & what that did to my credit score, there is no way I could have refinanced before the ARM would have put my mortgage payments beyond anything I could do.

Saying no to the home was the best thing I could have done. I made payments with the collection agencies for my medical bills, ended up paying off my car, lived in the neighborhood I hated for three more years & this May I drove by the PREFECT home for my little family. It is less than a mile away from my work & I love riding my bike to my job. This summer, my now teenagers & I were able to have lunches together when I came home for lunch. No, my credit score wasn't any better than when I first started, but I had saved & having a larger amount to put down made a lot of difference. Also, I have my fixed interest rate, but I pay a mortgage insurance to the lender for the "risk". My mortgage insurance cannot go up, however, if I make all of my payments on time, it can go down.

I'm sharing all of this so everyone understands.. I wanted a house as bad, as anyone who signed on the dotted line. I felt like a bait & switch victim when that occurred. But, it is my life, my money & my responsibility. Maybe these people had always been bailed out in life & don't get it, or maybe they are just the gambling type, or maybe the want took over good planning. More than likely something really lousy happened like a divorce, job loss ect ... We all know when you borrow anything there is a risk attached & you are expected to pay it back or meet the established terms. They took the risk & it didn't work out, I didn't take the risk & have myself in a home that I can afford now & 5 years from now.

They could have said no, they weren't forced into buying a home, if they didn't like the terms, they shouldn't have agreed to them.

This is my home...
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"But let's be clear what will happen to many of those people (on the order of millions) if there isn't a rate cut, which is that they will lose their homes, they will lose whatever money they put into those homes and they will effectively be unable to buy new homes for a long, long time. The negative effect on the economy from that would be pretty significant."

And let's be clear what will happen if there IS a rate cut: MORE money will be dumped into money-loosing ventures, the negative effect will get bigger and bigger and bigger.

It's way way way past time to have the hangover and be done with it. If we avoid the 7 million foreclosures now, it will be 14 million foreclosures later.

If a rate cut must come, we should wait until BLS-measured unemployment ticks above 5%. Cutting now would send the message that the government itself does not believe its own statistics, and does not even pretend to.

"And let's be clear what will happen if there IS a rate cut: MORE money will be dumped into money-loosing ventures, the negative effect will get bigger and bigger and bigger."

I think you've missed a couple of key points:

1. A 1/2 point rate cut (or even a full point cut) will not take us back to the way things were four or five years ago. The prime rate (which is the index for most ARMs) was at 4 percent in July, 2003, and has more than doubled since then. This kind of cut is more likely to give people breathing room than to induce another frenzy.

2. Lenders are not likely to go into a frenzy as a result of a rate cut, for three distinct reasons. First, the cut won't be that big, as noted above. Second, the current environment makes it harder for them to get money or sell off their mortgages on the same kinds of terms they got before, so they have financial incentives to be more cautious. Third, and probably most important, the housing market has cooled pretty dramatically, so they will have trouble achieving the valuations necessary to support the shakier loans.

Let me add that waiting for unemployment to spike above a predetermined level is an excellent way to be sure that the Fed doesn't intervene until after the economy is on its way into a serious recession. (And if I were a Republican politician, I would be pushing the Fed to do something, because I don't think I'd like to be running for Congress or the Presidency as unemployment is spiking and people are losing their homes.)

Any effort to reduce the number of foreclosures by simply blocking them or reriting the rules is a major mistake. It only delays problems.

If people are in payment trouble at x, they will still be in trouble at any reasonable new payment y.

The best answer is to accept that the loans never should have been made. The best answer is realize that we have a housing afordability crisis. Short of radical raises in wages, the only answer is to let house prices fall back to earth. Homme prices could fall 40% (guessing here) and still be back on a line of reasonable affordability in correspondence to CPI and real wages.

The best answer is to embrace the foreclosures - HOWEVER, steps should be taken to modify bankruptcy and tax code so that foreclosed parties stand some chance of picking themselves up and starting over.

FOR INSTANCE, instead of having FNMA act as a non conforming bailout machanism, how about having it serve as a foreclosed debtor re-strating mechamism? I would much rather see the GSEs use their power to take chances on fresh start loans for entry-level homeowners.

Thank you for sharing your story. Flesh and blood always beats abstract theory in my book.. I wish you and your children well.