Maybe we should blame the Fed and its low interest rates

Economists Brian Wesbury and Bob Stein:

"As in the 1980s and 1990s, the roots of our current financial market problems reach back to a period of absurdly low interest rates. In the 1970s, when the Fed held interest rates too low for too long, banks made similar mistakes with their balance sheets--borrowing at short-term rates to make longer-term loans in inflation-sensitive assets.

In this decade, by cutting interest rates to 1%, the Fed caused investment banks to overuse leverage-based strategies. Borrowing short and lending long turned so lucrative that many financial market players could not help themselves. Wall Street based its business model on leveraging up the most leveraged asset on Main Street--housing.

When the Fed pushes interest rates below their 'natural' level, mal-investment always occurs. And in the current case, the mal-investment was a double whammy. Not only did Main Street gorge on real estate, but Wall Street ate it up too. This double set of leverage has blown up because the housing market became overbuilt and housing prices stopped rising.

Mark-to-market accounting exaggerated this process by allowing firms to mark up assets above true fundamental value when the market was strong but is now forcing firms to mark down assets, to below true fundamental economic value."