Deja vu

Can anyone explain to me how a problem can be fixed by repeating what caused it in the first place?

That's what's happening to fix the meltdown in the world's economy and I can't find any sense in it.

The root cause of the problem was ludicrously low interest rates.

The problems we're now facing stemmed from those rates. The access to easy money they presented was the catalyst.

The relaxation of regulation and oversight added to the problem because it allowed human nature, such as personal greed, free reign.

People are blaming the banks and greed for the crash, but they came later. Without the low interest rates none of it would have happened.

As a result of rates as low as zero (Japan) and several other major economies at one and two percent the world was awash with cheap, easy money. Billions of dollars were being poured into the stock markets and as a result listed companies were valued at up to a hundred times earnings. They were never worth that much and it was unsustainable, but fund managers didn't know where else to put their weekly flood of money - the Australian superannuation funds are a good example.

Because money was so cheap and therefore easy to get, retailers of larger ticket items were advertising 'no deposit, no interest, no payments for twelve months' deals.

People could get money easily and looked for things to spend it on. That demand meant that under the rules of supply and demand house prices were pushed to unsustainable levels.

Living on credit, living beyond your means, can only last a limited time. At some stage the bills have to be paid.

The day of reckoning came and suddenly no-one had money, demand for products plummeted...and the old rules of supply and demand came back into play. But this time they drove prices down.

Property, such an important underpinning solid asset of many countries' economies, plunged in price. People, financial institutions, companies now had negative equity - their debts were larger than the assets guaranteeing them.

Companies earlier valued at many times their earnings now find themselves in some cases valued at less than the cash they have in the bank.

Crash.

So to fix the crisis our leaders have come up with answer. Put the rates back to the levels which caused the problem in the first place.

I believe they're doing it because they simply don't know what else to do. We need a new financial model but no-one's come up with one.

Interest rates need to be in a neutral range, between six and seven percent in my opinion.

That gives a reasonable return on investment for everyone, individuals and companies. It means that people such as the rapidly growing number of self-funded retirees can live on their investments. They don't need to ask for pensions or social security payments from government.

It means that people who are credit risks are less likely to be given loans, including for mortgages which are beyond their real means.

I know there are furious arguments about what the right action to take is. As far as I'm concerned reducing interest rates back towards zero is the very worst action.