Many people are saying that the rise in oil prices is the result of loose monetary policy. They say that there is an easy solution to the problem. Raise interest rates substantially, and the problem will be solved. Since the rise in oil is also the primary cause of rising inflation, the inflation problem will be resolved as well.

There are several problems with this line of reasoning. Oil continued to rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has the some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Then, there are the big questions. Why are oil prices rising? What is the short-term solution?

I believe that the main reason for the rise in oil prices is the rise of the developing world. The two nine hundred pound gorillas in this equation are India and China. Automobile demand is increasing in these countries and is likely to continue in the near future.

This is similar to the rise in oil prices in the late 1960's and early 1970's. After World War II, the United States was the primary industrial power. As the world industrialized, demand for oil increased. The United States was not the only nation driving cars extensively. Supply constraints were also introduced in the mid to late 1970's with the Arab oil embargo and the Iranian revolution.

The Fed's job is to control inflation. But is was established originally to keep financial panics from getting out of control. Since last August, it has reverted to its original role and failed miserably. Since it began cutting its Fed Funds rate 57% from 5.25% to 2.25% the price of a barrel of oil has risen 62% from $71 to $115. Simply put, the weaker the dollar, the higher the price of oil. Bloomberg News proves it -- noting that in the last year, there was a 0.96 correlation -- a correlation of 1.0 would be a completely safe bet -- between the Euro-dollar exchange rate and the price of oil.

If it bothers you to pay $3.66 for a gallon of gasoline you can thank the Fed along with cheerleader, Hank Paulson who brags that he's been talking about the U.S.'s strong dollar policy consistently. Of course saying and doing are two different things. Since January 2001, the dollar has lost 70% to the Euro. And since oil is traded in dollars, a drop in the dollar leads to a rise in price. And lower interest rates erode further the value of the dollar since it pays government bond holders a lower rate of return so they sell the U.S. currency and buy higher yielding ones.

But it's unfair to give the Fed all the blame. After all, we have been running the Federal budget at a deficit -- expected to hit $413 billion this year. Since the Fed has started cutting rates, other factors such as speculation by leveraged traders -- relying on the 0.96 correlation -- and political instability seem to have remained at the same level -- although the degree of speculation seems difficult to measure. And U.S. demand has declined due to the economic slowdown. So it looks like those dollar-weakening rate cuts are the one factor powerful enough to offset the demand slowdown to drive prices up.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Any investor looking to the Fed to bail out current credit problems is looking at part of the answer. The Fed can only do so much. It can lower interest rates. It can add money to the economy. But that isn't going to be enough to cure all the bad mortgages or delinquent credit card payments. And if the Fed adds too much money to the economy, it feeds inflation. The Fed needs help from Congress and the President and mostly business, particularly the banks and thrifts that made the loans.

Here's the essence of the problem: even if rates go much lower, if people don't have jobs, they won't borrow money because they don't have the means to pay it back. Furthermore, banks won't lend money to the unemployed or underemployed. They've already done that. That's why we're in this mess. And they should be the ones to pay for it, not taxpayers. The lenders need to face these problems squarely and take the necessary measures to work them out.

Reuters reports that jobless claims jumped to their highest level since 2005. Specifically, U.S. workers applying for unemployment benefit rose by 38,000 last week, posting the highest reading since September 2005. I guess Fed Chairman Ben Bernanke had the statistics on his side when he testified that "It now appears likely that real gross domestic product [GDP] will not grow much, if at all, over the first half of 2008 and could even contract slightly."

The key is how the statistics performed relative to expectations. The 407,000 jobless claims reported in the week ended March 29 was way above economists' estimates of 370,000. If consumers lose their jobs, they'll have even more trouble borrowing to pay their rising costs of living. Although government statistics hide it -- anyone who drives or buys food knows that prices are rising.

Bloomberg News reports that job losses are coming from homebuilders and housing-related businesses, including lenders and financial service companies with exposure to mortgage-backed securities, are also stepping up firings. It also quotes an analyst who said, "400,000 is usually a trigger point when we consider recessionary times." I credit Bernanke for knowing a bit more about what's going on -- unlike the President who was shocked to learn about $4 a gallon gas. .

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

BusinessWeek reports that the $29 billion "loan" that the Fed is making to finance JPMorgan Chase & Co. (NYSE: JPM)'s $1.2 billion acquisition of The Bear Stearns Companies (NYSE: BSC) is really an equity investment in $30 billion worth of mortgage-backed securities (MBSs).

If that investment goes sour, taxpayers will suffer. I think we deserve to know more of the details of those MBSs before the deal closes. For instance, what would a buyer be willing to pay for those MBSs in the open market? If the answer is 10 cents on the dollar, why should taxpayers be on the hook for the losses?

To do the deal, a Delaware-based limited liability company (LLC) will receive the $30 billion worth of Bear MBSs. The Fed will "lend" $29 billion to that company, which will pass all the money along to JPMorgan. JPMorgan will contribute a $1 billion loan to the LLC and BlackRock ­Financial Management will pay back the LLC's loans by gradually liquidating the assets. The Fed gets paid back fully before JPMorgan gets back anything on its loan. And if, after JPMorgan gets paid back, there's money left, the Fed gets it all.

The Bear Stearns (NYSE: BSC) deal happened fast, almost overnight. Some analysts think buyer JP Morgan (NYSE: JPM) got a great deal because the Fed is backing almost $30 billion of Bear Stearns asset values. Within days of an announcement of the buyout, the big bank had 39.5% of BSC shares, a lien on its headquarters, and a very firm deal at $10 a share.

According to The Wall Street Journal: "Indeed, it's possible a Delaware court could find these features coercive, and depriving shareholders of a true vote." It is true that Bear's shareholders did not have much time to consider the idea. The Fed and JP Morgan would argue that there was not time. The brokerage was about to go under.

As is true with most visible deals that involve shareholder rights and employment, Congress may decide that it wants to look at the transaction, as if it did not have better things to do.

The perverse argument here is that shareholder rights trump the company's survival. It leads to a conclusion that the holders of Bear Stearns stock should have been able to accept or reject the JP Morgan bid, even if it caused Bear Stearns to go under. In essence, shareholders have the right to lose all of their money, if they wish.

Douglas A. McIntyre is an editor at 247wallst.com.

It has happened before. The cuts were especially deep after the market crash in 1987. New York City now believes that Wall St. will cut 20,000 jobs over the next two years. The number seems too small.

Accoding to Reuters: "The city's Independent Budget Office, in its report, estimated that Wall Street's profits for 2007 will sink by more than 80 percent to the lowest level since 1994." Financial firms account for almost 35% of all income in NYC.

While this would seem to be a local problem, that is not entirely true. Companies that sell luxury items from Tiffany (NYSE:TIF) to BMW will take some hit from falling employment among workers at big banks and brokerages.

Just as important, all of these people pay a hefty federal income tax. As unemployment grows the government will see receipts from the IRS fall. The more of the rich who move off the payrolls, the more difficult it will be to cut the Federal deficit and fund agencies like the Fed.

Douglas A. McIntyre is an editor at 247wallst.com.

Today the market is closed for Good Friday. Maybe the market can use the day off.

The market is bipolar. Rising from stratospheric highs to crushing lows at the flick of a switch. Mind you, sometimes it takes a big event to turn the market on and off and sometimes it doesn't take much of anything. That's what makes the market so maddening to follow.

Bloomberg News argues that the market's reaction indicates that Federal Reserve Chairman Ben Bernanke's strategy of aggressive interest rate cuts is working since commodity prices had a huge sell-of this week.

"The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos. (NYSE: BSC), the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes," the news service reported. "The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29."

But any rejoicing may be premature. Consumer confidence remains shaky amid continued worries about the real estate market. Applications for unemployment benefits soared to their highest level in nearly two months, according to the Associated Press. In short, there is plenty to worry about.

The trick for investors is not to panic and do anything rash. Markets aren't volatile forever and do eventually sort themselves out. Getting to that point may cause quite a lot of pain in the meantime.

I have friends who work at Bear Stearns (NYSE: BSC) and one of them in a very senior capacity. Believe me, they are not laughing and this is actually quite a sad moment for them and their colleagues. Bear Stearns had an 85-year history having come through the Great Depression and several recessions. Bear was a proud trading house and took great pride in its trading prowess. Sure, the naysayers will argue that Bear bit off more than it could chew and that Bear was a greedy Wall Street firm. But there is more to the story and it should be told.

Bear Stearns was the second-largest packager of mortgage backed securities only surpassed by Lehman Brothers (NYSE: LEH). As we saw these past couple of years, the quality scale on mortgage-backed securities slid down to lousy, risky sub-prime mortgages. But keep in mind that the $400 billion worth of securities that Bear Stearns underwrote and managed were not all lousy credit risks. The biggest part, more than $300 billion worth were of the highest quality. Bear Stearns facilitated a market that needed facilitating!

In the old days, only major banks underwrote mortgages and they typically kept and serviced the loans. But as the American population and economy expanded these past 20 years, mortgage companies were formed and needed to "sell the loans off" as they did not possess the capital base of say a Bank of America (NYSE: BAC) or a Wells Fargo (NYSE: WFC). Firms like Bear Stearns became adept at packaging these loans and re-selling them to major pension funds and hedge funds globally.

The Fed has opened itself up to take some fairly weak securities from banks in exchange for funding to keep them liquid. According to Reuters: "The U.S. Federal Reserve is taking a risk by opening up its own balance sheet to the same poisonous securities that have strained banks to the limit."

The agency may feel it has little choice other than to swap good money for bad securities. The problem is that, if it does not, some large financial institutions could fail. The Fed can wait to see if the value of the securities increase over time as some subprime mortgages are paid off and locked up credit markets start to trade again. But, to think that the investments will ever be worth $1 for $1 that the Fed lends out is highly unlikely.

That means that the government has gone all the way to bailing out these companies and that tax-payers will foot the bill for tens of billions of dollars of "losses" at the Fed.

But, even if the tax-payer is asked whether he would like to pay a few more dollars to help big financial institutions stay in business or lose his job in a huge recession, he is likely to vote for paying the extra money.

Douglas A. McIntyre is an editor at 247wallst.com.

Reuters reports that Carlyle Capital -- an affiliate of Carlyle Group that counts former President George H. W. Bush among its advisers -- can't pay back the $16.6 billion it owes banks. So its lenders are taking possession of its assets to try to recoup some of the money they lent. Interestingly, it said that the only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities (MBSs). If these securities are indeed worth their AAA rating, I wonder how much of a "haircut" those lenders will take.

This latest collapse is evidence of two viciously destructive cycles in the global credit markets which government policy decisions are making even worse. The first cycle is driving down the stock market, setting inflation on fire, and hammering the dollar -- which is down 68% since 1/19/01 -- as the economy slows. The second cycle is reinforcing a chest-clutching decline in the value of the $6.1 trillion MBS market:

• The Bernanke call. As I've posted, this means that Federal Reserve Chairman Ben Bernanke's moves mark a ceiling below which the market keeps falling. The basic idea is that when the stock market falls, the Fed responds by flooding the market with money -- interest rates have fallen from 5.25% to 3% and are likely to hit 1% and then there's the "Term Auction Facilities" like this week's $200 billion month long swap of government securities for MBSs. The lower rates and added money spur inflation -- oil (+357% since 1/19/01), food prices rise (e.g., milk prices +12% in 2007) and gold futures hit $1,000 -- but do nothing to solve the basic problem -- which is to recapitalize banks. The market falls on the announcement of a new credit market problem, such as Carlyle's default, and the cycle begins anew.

Nobody knows why the market rose 416 points yesterday. But The New York Times reports that the Fed made an extraordinary move yesterday -- it offered banks $200 billion for a month -- letting them use Collateralized Debt Obligations (CDOs) as collateral for the loan. This inflationary move helped drive oil to $109.72, up 357% since 1/19/01 and cut the dollar declined to one Euro to $1.5469, down 68% since 1/19/01.

But beyond the inflationary impact of the move, there's less here than meets the eye. Certainly, the surprise effect might have forced investors who had a short position to cover by buying back shares. That short-covering may have had a snowball effect. But there's also this -- if banks take those $200 billion off their books, there's still $6.1 trillion worth of CDOs on the market. And what will happen to those $200 billion worth of CDOs at the end of the month?

But there is an interesting twist -- the Fed claimed in a conference call with reporters that it was minimizing risk by accepting only securities that still had the highest triple-A ratings and that they would impose a discount, on mortgage bonds that appear to carry additional risk. If there is any meaning in those AAA ratings then the banks will end up pledging their highest quality securities as collateral and retaining more of the dodgy ones.

Alan Greenspan may appear to have a gift for the obvious. He says that a recovery in the housing market is necessary for a recovery of global credit markets. Since subprime and other mortgage instruments have pulled down earnings at a number of huge banks and brokerages, that would not seem to be any news.

"The sooner we can get home prices in the United States stabilized, the sooner we will resolve all questions," Greenspan said, according to Reuters.

Greenspan may be wrong. If banks can wash mortgage problems through their balance sheets by aggressive write-downs, they may be able to build a firewall against rising default rates. The federal government may also step in through the FHA to help refinance or "guarantee" a number of home loans.

The comments also neglect to acknowledge that most large companies have record sums of cash on their balance sheets, by one measure over $600 billion at the firms in the S&P Industrial Index. Earnings at many companies may drop but their core finances probably will not be threatened.

Housing may be important, but it is only one leg on the stool. The government's biggest job now is to make sure that all the other legs are healthy.

Douglas A. McIntyre is an editor at 247wallst.com.

The Fed's relentless policy of interest rate cuts is working like a charm. The dollar hit a record low against the Euro ($1.5057) and oil hit a record $102 in response -- up 325% since January 2001's $24. The record oil price has not yet found its way to the gasoline pumps -- but it will. If oil prices remain above $100, by this summer gasoline prices will top $4 a gallon -- or $80 for a 20-gallon tank. Back in January 2001, you would have paid about $1.59 a gallon -- so you've got a 152% price increase there.

What is going on here? According to the New York Times, producer inflation is up 7.4% -- the worst since 1981. The U.S. has pursued a weak dollar policy -- relative to the Euro, the dollar has lost 63.7% of its value since January 2001 when it traded at 92 cents to the Euro. And since oil is denominated in dollars, a weaker dollar translates into a higher oil price. That excludes the effects of political instability in oil producing regions -- Iraq and environs -- and rising oil demand in China and India.

I've long believed that the explanations for daily market movements make no sense. If you want to know why big market players buy or sell, the media is not going to find out for you. And since you have no way of knowing who the big players are; what they're buying and selling; and why, the best you can hope for is the daily quotes from some market analyst on a reporter's contact list.

Thinking about those probably meaningless comments, it seems that the stock market has been moving based on three factors over the last several months: oil prices, credit market conditions, and the Fed's actions. In theory, there are lots of possible combinations of these three, but here are three scenarios that might be worth considering:

• Rising market. What makes the market rise in the short-term? There are two things that have really driven up the market. Unexpectedly good news on the credit front -- whether it's a bank taking a lower than expected write-down or a deal to save the bond insurers. And of course, in the short-term, stocks seem to rise anytime the Fed announces a bigger-than-expected rate cut or suggests that further cuts are forthcoming.