Where can I get in on this zero-interest action?

In normal times, the Fed controls that short-term rate by moving billions of dollars of cash in and out of the financial system. Pump in a little more, and more banks have money to lend, so rates dip a bit. Take money out of the system, and rates tighten up. The Fed’s open market desk in New York buys and sells Treasuries to make this happen.

These, however, are not normal times. The global markets are in such a panic that banks, investors, pension funds, governments — anyone with large pools of money to manage — have been flocking to short-term investments like U.S. Treasuries. That flood of cash has overwhelmed the Fed’s efforts to manage short-term rates, pushing them to zero.

But lenders who make long-term loans like mortgages don’t use short-term rates. Not if they want to be in business for the long-term. Consider for a minute what would happen if a mortgage lender borrowed short-term money today at, say .25 percent, and lent it out for 30 years. Since interest rates are almost certainly going to rise in the next 30 years, that mortgage lender would lose money. It’s not a lot different than you buying a 30-year CD (if they were available) at 0.25 percent — only to lock in your savings at a subpar return rate for a lifetime.

Mortgages lenders get their money from investors who demand higher rates to compensate them for the likelihood that rates will go up in the next 30 years. So last week, the Fed said it’s going to try to cut long-term rates, too — a move that’s never been tried before.

The plan involves buying up long-term Treasury bonds in such massive quantities that the rates on those securities are pushed lower. (Demand for bonds pushes up their price; when prices rise, the rate falls.)

Millions may have to repay part of tax credit Some 15 million taxpayers could unexpectedly owe taxes when they file their federal returns next spring because the government was too generous with their new Making Work Pay tax credit. Obama administration faults Senate bank bill Warren Buffett: Financial panic is over Pay czar concerned firms could lose talent U.S. banks to prepay $45 billion to FDIC

The hope is that if the average return on long-term Treasury bonds is pushed lower, investors will have to look elsewhere to get a decent return on their investment. With the government backing Fannie Mae and Freddie Mac, loans managed and sold by those mortgage agencies are almost as safe as Treasuries. If all goes well, that should push mortgage rates down along with Treasuries, helping to get the battered housing market back on its feet.

Just the word that the Fed is moving in this direction has already had an impact. By the end of the week, 30-year mortgage rates had dropped as low as 5 percent — the lowest in 37 years.

Unfortunately, those lower rates won’t help the millions of homeowners facing foreclosure who are stuck in unaffordable loans with onerous “pre-payment penalties” — sometimes as much as half a year’s interest payments. Without additional government relief, those homes will likely get dumped on an already glutted market, pushing the housing recovery into 2010 at the earliest.

Also in msnbc.com business Answer Desk: Overpaid and bailed-out at banks? Your Career: ADA expands to cover more workers Venza sorta-crossover is Toyota’s latest mistake ConsumerMan: Chinese drywall remains a big threat   Video: This beer would cost you at least $8,000

MORE FROM ANSWER DESK

Answer Desk Section Front

Who needs overpaid bankers? Who gets extended jobless benefits Easing job losses point to wobbly recovery Long-term jobless face frayed safety net GDP growth overstates case Recession over? Readers don't believe it Breaking down the cost of health care Commercial real estate bust looms 'Official' job numbers don't tell the whole story Getting mortgage help Answer Desk Section Front   Add Answer Desk headlines to your news reader: