Mixed reaction to Federal Reserve chairman Ben Bernanke's plan to stop mortgage lenders from conducting the type of practice that led to the current sub-prime mortgage crisis. Boiled down, there is a ban on lenders making subprime loans "in a pattern or practice" that disregards a borrower's ability to repay. The rules also would bar lenders from making high-cost loans that rely on unverified income or assets. There will also have to be "escrow" accounts to ensure that subprime borrowers' property taxes and home insurance are paid, and the rules seem to clamp down on payments to mortgage brokers that can give unscrupulous brokers a way to squeeze excessive more money out of a loan.

As expected the politicians are all over the place, as revealed by The Wall Street Journal. Some claim it's an important step towards enhancing market stability and other saying it does nothing to protect consumers.

The Center for Responsible Lending has slammed the Fed's plan, claiming it fails to attack the root causes of the problem. Instead of banning prepayment penalties, the Fed has just put in penalties and it has also put the onus on consumers to prove that the lender made loans without regard to the homeowners' income and repayment ability. "An unregulated market has led to irresponsible lending practices where lenders often don't even assess ability to repay. The resulting high rate of foreclosures due to this abusive lending may well bring this country into recession-yet the FRB has chosen to issue rules that leave out many loans or will be unenforceable."

This raises one important question: how did we get into this mess?

As the New York Times tells us today, this was a disaster waiting to happen going back seven years ago when former Fed Chairman Alan Greenspan brushed aside warnings that subprime lenders were luring borrowers into risky loans. "If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession."

It's a point echoed by Houston Chronicle's Loren Steffy in his blog when he reminds us that the Fed has closed the barn after the horses have bolted. "These are all things banks should have been doing all along. The fact that the Federal Reserve, the most august financial oversight body in the world, actually has to put this in writing shows how far lenders strayed from the basic tenets of responsibility." And of course, where was the Fed when all this was happening?

Thanks to the Fed's failure to act earlier, we are now walking through a minefield and the problem with minefields is it's hard to pic what's beneath the surface and Goldman Sachs economist Jan Hatzius calculates "losses of around 400 billion dollars" for global banks and investors, forcing banks to scale back their lending by $2 trillion.

Despite the Fed's action's, Bloomberg reports that US corporate defaults will probably quadruple next year with more companies going into junk land.

All of which is a reminder that nobody really knows exactly what's going on in the global credit markets. Predicting what's ahead is difficult because all those bad debts have been buried under layers and layers of CDOs, which is a fancy term to describe basically a bundle of risky debt, that includes mortgages, bonds backed by some of the riskiest home loans in the subprime market, credit card debt and loans to private equity. All this has been parcelled up into neat little sections, or tranches. Needless, to say the banks have made a killing out of these by bundling them and then creating a buy/sell spread in the secondary market. This is a disaster but one that could have been prevented years ago.