Fed chairman signaled another interest rate cute yesterday, while saying that he economic conditions have become distinctly less favorable. Over the span of just eight days in January, Bernanke slashed rates by 1.25 percentage points — the biggest one-month reduction in 25 years!

This move should worry us all. Since it is our cheap money addiction that drove us toward this deep recession, why trying to cure the disease with the same faulty logic?

According to the latest essay of F. William Engdahl, it is crystal clear that the catastrophic meltdown must be attributed to the failure to regulate money and credit creation.

As Lawrence Summers, a prominent Harvard professor, ponders America’s need to find a way to stem foreclosures the Bush administration plans to Veto Foreclosure Bill. Mr Summers does not have the reputation to be an alarmist but here some highlights of what he told the Financial Times as of Feb 25/08:

… All honest analysts accept that policies adopted so far, such as the “teaser freezer” limits on resetting mortgage interest rates and increased federal support for mortgage lending, have had only a marginal impact on what may be the most serious crisis in housing finance since the Depression… It appears house prices are down by 5-10 per cent from their peak, with derivatives markets predicting further declines of about 20 per cent… Price falls of this magnitude are likely to mean more than 10m would have negative equity in their homes…

Without finding ways of writing down mortgage liabilities, new finance will do nothing for the problem group that has negative equity. Direct government intervention in mortgage markets risks creating delays, burdening taxpayers and inhibiting necessary adjustments in house prices…

The rationale is the prevention of costly and inefficient liquidations. It is hard to see why similar protections should not be prudently extended to family homes…

Second, methods need to be found to enable creditors who accept a writedown in the value of their claims to retain an interest in the future appreciation of the
homes on which they have mortgages…

Bankruptcy reform alone could, on some estimates, avert 500,000 foreclosures and, by establishing templates for renegotiation, aid a wider restructuring of mortgage debts.

Alas as the Bush administration showed, there is so much conflicts of interests that even the best intentions may morph into mirages forever. Ben Bernanke knows this and this is why he lowered the interest rates again. How low can they go - and at what price?

President Bush said Thursday the country is not recession-bound and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts. “We acted robustly”…  (Feb 28/08)