Investors are celebrating the possibility the Federal Reserve will again cut rates, with the market jumping by more than 300 points yesterday as the Fed’s most recent survey disclosed concern about a slowing of the economy. Even more reassuring was that a Fed governor, Donald Kohn, in a speech before the Council on Foreign Relations, ably articulated the problems and the risks facing the economy. This was good news because in the past few weeks it has sometimes seemed as though the Treasury secretary, Henry Paulson, and the Fed chairman, Ben Bernanke, have had no clue as to what’s actually going on in the business community.

This country is in the midst of a credit crisis. Here’s the reality: Investment-grade companies cannot secure financing. Every day I talk to someone whose real estate deal failed at the last minute because the promised bank loan didn’t come through, or whose acquisition collapsed because the bank making the necessary loan found it could not be syndicated. These are real problems, not just for those undisciplined lenders who made foolish mortgages, or the irresponsible people who borrowed the money and now are crying foul. It’s a problem for every business in the land, and for investors, too.

As the mortgage disaster has seeped into the credit markets, investors have been alarmed by ever-rising estimates of the loans on the verge of failure. Is there an easy solution to these issues? No, but it would seem that a two-pronged approach is called for.

The credit market problems started with subprime mortgages, and the widening failures in that arena have to be addressed. Legislating against future abuses may be politically attractive, but the real need is to help lenders and borrowers work together to minimize the default rate. Rising foreclosures only force property prices lower and cause more failures. It’s a vicious circle.

In California, Governor Schwarznegger has come up with a plan to help stem the mortgage crisis. (Governor Spitzer, meanwhile, is chasing around the Senate majority leader, Joseph Bruno, like a fourth-grader in the schoolyard.) California is the hardest-hit state in the country in terms of foreclosures, with seven of the 16 worst metropolitan areas. In those seven areas, there was one foreclosure for every 60 households in the past quarter. To stem the trend, Mr. Schwarznegger has teamed up with four of the largest loan servicers, including Countrywide and GMAC, to try to keep subprime borrowers in their homes.

The lenders, which account for roughly a quarter of the subprime mortgages in the region, will not raise interest rates above the terms initially agreed upon if the borrower is living in the home and is current on payments. That is, they are supporting occupants, as opposed to speculators. The threat to the state is acute, in that half a million subprime borrowers are facing interest rate resets in the next two years.

California’s plan was modeled after a proposal made by the FDIC chairwoman, Sheila Bair. According to spokesman Andrew Gray, the FDIC is considerably more optimistic than a couple of months ago that this approach is going to take hold nationally, affecting as many as 1.2 million people, with $220 billion in loans expected to reset over the next 13 months.

It is reasonable to expect that prices for existing homes, which were off more than 5% year-over-year in October, might begin to stabilize if the threat of widespread foreclosures dissipates. At least it’s a start.

At the other end of the credit pile-up is the need to resolve the exposure of financial institutions to bad loans captured in structured investment vehicles. The move by HSBC to take $45 billion of SIVs onto its balance sheet cleared the air on its own exposure to the leveraged debt instruments, possibly providing a model for others. As risk management expert Andrew Davidson told me months ago: “There are thousands of financial institutions. We know maybe 40 have a problem. The issue is we don’t know which ones they are.” Cross HSBC off the list.

Unfortunately, there are many others that are still not in the clear. There is no way to value many of the securities held by these SIVs, because there is no trading in them that would establish a price. That’s why it is extremely important that the so-called Super-SIV get up and running as quickly as possible. As the managers of the expected $75 billion portfolio begin to accumulate these assets, the price transparency and the stability of the market will increase. At the same time, some liquidity will be restored to the SIVs, which are being turned away from the short-term credit markets.

Instead of Messrs. Bernanke and Paulson being bogged down in a Mandarin-like assessment of the positives of lowering interest rates and easing credit against the negative of a possible future uptick in inflation, they might be using their leadership to get this Super SIV in business.

The building of this vehicle started two months ago. “A lot of progress has been made,” we are told by one of the participating banks. That’s good to know, but it would be even better if the Super-SIV were up and running. It is doubtless challenging to convince banks that are not exposed to these faulty investments to pitch in. Still, that’s what leadership is all about.

When New York City faced its financial crisis in the mid-1970s, the mayor, Abe Beame, inveighed upon a few outstanding business leaders of the time, including Judge Simon Rifkind and the head of Lazard, Felix Rohatyn, to figure a way out of the mess, and they did. They set up the Municipal Assistance Corp., which ultimately provided the financing the city so badly needed.

George Gould, who served as chairman of MAC, points out that the threat then to the city, and today to the business community at large, is liquidity. Mr. Gould also served as liquidator of Drexel Burnham. “Drexel was never bust,” Mr. Gould points out. “It had a huge liquidity problem. The owners of unsecured credits ended up getting paid $1.10 to $1.20 on the dollar.”

Considering that Drexel did indeed go bankrupt, that’s a sobering thought, and one that will hopefully inspire our financial leaders, wherever they are, to fix this mess.

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