By James Saft
Reuters

LONDON (Reuters) - The fuel lines of the global financial markets are all but frozen, leaving the Federal Reserve no choice but to cut interest rates, despite concerns about bailing out speculators.

To fear “moral hazard” - encouraging imprudent risk takers by stepping in when markets turn bad - is at this point out of all proportion to the risk that the U.S. tumbles into recession.

It’s been a month of scary statistics but none scarier than a survey of U.S. mortgage brokers that found a third of all home purchase loans originated in August were cancelled.

Those aren’t hedge funds or private equity firms taking their lumps, those are home buyers and consumers who can’t get credit in large part because financial markets have seized up.

And if you think the mortgage brokers are crying wolf, look at issuance of mortgage bonds backed by loans not eligible to be sold to Fannie Mae or Freddie Mac.

Lehman Brothers figures show non-agency mortgage security issuance falling to $15 billion in August, down from $41 billion in July and $70 billion a year ago. And rates are much higher, up by 0.85 percentage points since June for prime loans larger than Fannie and Freddie’s $417,000 limit.

Consider too that many of these loans are tied to the London interbank rate, which has ballooned as banks scramble for cash, and the pain is even worse.

The asset backed commercial paper and the interbank loan markets aren’t functioning properly, with money difficult to obtain for more than a few days, or only available at punitive rates.

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