Maybe the banks thought the economy would be better and people would have better and higher paying jobs by the time the rates adjusted upwards. Maybe there was some sort of idea that this was a good idea. Maybe they were out to pad earnings and just didn't care. We will probably never know which is accurate.

Fed Funds rates couldn't stay at 1% forever. That would lead to hyperinflation and the destruction of the U.S. Dollar. (Low rates lead to inflation which lead to more money which leads to a devaluation of the currency, supply and demand and all that.) As Greenspan's last series of acts, a program of rate increases was introduced in 2004, raising the rates from 1.25% (June 30, 2004) to 4.50% on Greenspan's last day on the job: January 31, 2006. His successor, Mr. Bernanke, continued this policy, raising the rates to 5.25% by June 29, 2006, and holding there.

As rates rose, the ability to do the low teaser rates on variable mortgages ended, which sapped up demand at the bottom end of the market, which led to less demand, which would become apparent in the summer of 2005 when the housing market – in terms of ever-rising values - abruptly stopped.

Now for the snowball effect.

As values stopped increasing, people who used to flip homes for profit were left without profit, and eventually when the banks stepped in and foreclosed, without a home. With less buyers around there was less demand to build homes, yet builders continued to build with promises of a return to the boom in short time. The return never came and there was a massive oversupply in homes. Oversupply of a good leads to lowered demand which leads to lowered prices and values which leads back to the start of this sequence to be repeated once more. This has gone on now since the end of 2005 and shows no signs of stopping. Home sales are falling at their steepest rate in nearly 20 years. Valuations are falling for the first time in which they have been closely monitored (since 1991).

Oh and those subprime people. Well, as Fed Funds rates rose, taking the rest of credit rates with them, suddenly people taking a 2.5% teaser rate are finding their mortgages adjusting up to 5%, maybe 5.5%, maybe even 6. They are seeing their mortgage in some cases double in price and they aren't seeing a better job or higher wages, and so soon they will be seeing that foreclosure notice if they haven't already.

The year 2007 is the year where all of this began to hit the fan. Over two dozen subprime lenders have gone under. The credit crunch spreads worldwide since in this wonderful global economy, everyone is left holding the bag instead of just one region.

Now the problem for the Fed. People are screaming for lowered rates to breathe some life back into this economy that was built on an unsustainable bubble in the first place. The logical response would to be to admit the bitter pill swallowed, and to ride this out as it should be. The end result of the bubble being so large and bursting so hard would be a recession, that is at this point unavoidable. Instead, the Federal Reserve decided to give more crack to the addict – lowering rates by .5% to 4.75% on September 18. The addicts on Wall Street ate it up, pushing major indicies like the Dow Jones back to near all time record highs. The realists who trade the American dollar here and abroad, they know the writing on the wall and they know what is coming.