Pisani's Trader Talk: Taking Lessons from Former Crises

If that's true, why are so many clamoring for a rate cut? If it is a credit problem, cutting the funds rate will make little difference, particularly since they have already flooded the market with liquidity. It will not magically make billions available to Countrywide or any other mortgage lender.

Still, traders like Charles Campbell at Miller Tabak has pointed out that this is a psychological Bear market--and in these kinds of markets a Fed cut--stock traders hope--will have the psychological effect of freeing up money to the players who need it.

Maybe. What is really needed is for major financial players, a strategic player (like Fannie Maeor Freddie Mac), or foreign players, to step in and make the market function normally. Expanding Fannie and Freddie's role--allowing them to buy more mortgages--is widely advocated, but generally opposed by their regulators.

Even if the Fed cuts rates, the mortgage companies have instituted tighter lending standards. And with home prices down in several key markets, many will still have trouble qualifying for mortgages.

Here's the bottom line: banks are raising cash, and squeezing everyone else. They are unlevering the financial economy. They will shut down some mortgage lenders, even some non-bank lenders, and then they'll start lending again.

The long-term risk comes a few months from now: what happens when a major corporation goes to the well to issue new corporate paper for expansion, and the major players are not willing to buy?