Several readers suggested federal funds rate policy as a topic. "Was listening to the radio this amr. I forget if it was Bloomberg or CNBC. The announcer said that several of the big banks predict the Fed is gonna DROP rates this or next neeting. Almost all predict a drop in early to mid ‘07."

"The responder said: (paraphrase) 'are you kidding? retail sales are up the last 3 months. Wages have risen, gas prices are down. The consumer seems as strong as ever.' To me, it now seems obvious that the Fed will risk inflation/hyperinflation to save housing as much as possible. Otherwise they would have raised. Instead, they’re squaking like chickens and then holding the FFR steady."

"Perhaps the Fed actually does see housing as 'too big to fail,' specifically because of Fannie/Freddie, all the MBS out there, and the potential 'systemic risk.' A little stealth inflation to steal the bailout from us, instead of repeating the obvious S&L bailout?"

A reply, "I wonder if we don’t end up like Japan with a deflation problem after this plays out. Japan tried to inflate its way out of its bubble and had interest rates at basically 0 % but no one would spend. There seems to be a consensus that this can’t happen here, but certainly the Japanese are not any less capable at solving problems than us."

Another said. "What is a fall in mortgage interest rates suppose to do? 14+ increases from the FED and the 30 year rates have barely budged. (To my great bafflement). The money printers really want to put the brakes on RE and get things back to reality, you need to push to the mid 9’s, like Greenie did in ‘94."

"The RE mess still boils down to a market run-up fueled by toxic loans. The fool pool has been fished out. People are being educated to the realities of being stuck with a highly illiquid 'asset.' Feds can do a Japan drop for all that matters. But the point still remains-average incomes cannot purchase an average house at today’s levels. FED is stuck in the mud."

And another, "Dropping rates won’t solve the issue. The effective interest rate for purchases is below what they can sustain the dollar on due to funky financing and the total overextension of credit. It’s doomed to implosion, suckering in more buyers only extends the population who will suffer."

One looked at the markets influence. "The Fed sets very short term interest rates. Longer term rates, like the 10-year (which is what the 30-year mortgage generally follows) are set by the market and its expectations. Obviously, the market expectation is that over the next 10-year period, rates will moderate. That doesn’t rule out a big spike in short term rates at all."

"Now whether 'the market' and its expectations will turn out to be correct over the next 5-10 years, that’s a whole ‘nother story."

One said, "People aren’t buying based on 30 yr fixed anymore anyway. One of the big causes of a housing meltdown will be when people’s ARMs reset. When they reset, they will of course reset higher. The people are in trouble because they can’t afford the new payment, they can’t afford to sell, so they foreclose."

"Dropping the FFR will likely drop the ARM rates. Thus, as people get to their resets, their payments don’t jump as much, and thus less of a 'shock.' This will NOT lead to increases in housing prices again. But it may slow the fall of housing prices."

"Thus, the fed may be trying to engineer a 'soft landing.' By allowing as many people as possible to either refinance into ARMs or by keeping their payments down upon the ARM reset. It just buys time. In the end, it’s giving borrowers more rope to hang themselves."

"But borrowers have proven that they are stupid beyond belief. Many of them will be thankful for the gift from the benevolent fed. In the process, lowering the FFR will of course cause the dollar to start losing value. thus, we Americans will become more 'competitive.' Thus, our incomes (in nominal of course) will rise somewhat. Or at least not fall as far as they were falling due to global arbitrage."

One looked at the consequences of lower rates. "Reducing the fed funds rate prematurely will cause inflation and once the bond markets realize we aren’t headed into a deflationary recession they would demand a lot more than 4.8% yield on 10 yr treasuries."

"The other problem as you mentioned would be a significant deterioration of the dollar. This will fuel inflation as imported goods are more expensive, and will also create a glut of bonds as foreigners refuse to buy dollar denominated assets. We could see yields go through the roof, which would really put the screws to housing."

"The only thing that can help housing would be wage inflation, and I think global labor arbitrage through offshoring and massive illegal immigration is going to keep a lid on the price of labor."

"I don’t expect the FED to cut rates until late 2007 after negative GDP growth is reported and both stocks and housing have lost a lot of steam."

One comment from Las Vegas. "I can see how lower rates would help homeowners who got sucked into the mania and purchased more house than they could afford, but I’m not sure how much lower rates will help folks who bought two, three, or more homes with the intention of selling quickly at a profit. How long can those 'investors' afford to wait before they must sell? I see lots of empty homes here (Vegas)."

One pointed out, "My husband and I are currently renting and have no motivation to purchase a home right now. Why? Housing prices are simply too high relative to incomes. We just don’t want to put ourselves at financial risk by buying a house. If we had to move a few years from now, who could afford to buy that house from us? At the current rate at which wages are (not) increasing, the answer to that question will be: No one."

The New York Times. "Maybe the sputtering housing market will not be that big of a drag on the economy after all. Falling gas prices are leaving Americans with more money to spend, and inflation has become less of a threat in recent weeks, according to a report released yesterday by the Federal Reserve."

"The growing trade imbalance with China was a major factor in the ballooning trade deficit. The unadjusted trade deficit for August was $79 billion. The numbers defied expectations. Economists who were surveyed before the numbers came out predicted that the overall deficit would fall in August, but it rose."

"When the gap hit a record in July, economists said they believed that the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell. Still, many economists said yesterday that they now believed that the turning point was near."

"'This is probably as bad as it gets,' wrote Paul Ashworth, senior United States economist with the economics research firm Capital Economics."