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The credit markets are bracing for more trauma as the subprime mortgage market meltdown continues to infect credit markets worldwide in unexpected ways.

It appears that the investment bankers did a bang up job in packaging questionable loans and making AAA rated securities out of them by some sort of financial magic. Unfortunately, investors are now feeling the pain as loans made to people with little ability to repay go sour.

Gee, who would have ever thought that folks who were granted housing loans without credit checks or income and employment verification might lie a bit on their loan applications? And that the appraisal and credit rating agencies would be so sloppy with their approvals and credit ratings?

The financial markets are on the edge of a deep abyss. A fall into that abyss may well be triggered by the massive unwinding of the Yen carry trade on world financial markets.

In it’s most basic terms the Yen carry trade is a transaction where borrowers borrow Yen at very low interest rates, convert Yen into other higher yielding currencies, and use the proceeds to purchase higher yielding assets.

The carry trade has worked well over the past several years as a weak Yen and extremely low rates of interest in Japan have been a given.

The fall out from the meltdown of the sub prime lending housing market probably has a very far way to go. Bear Stearns has recently had a very bad time of it. It’s not often that a big Wall Street firm has to hold a conference call in an effort to prove its creditworthiness, but these are not ordinary times.

The following is from Forbes online magazine:

“Bear Stearns (nyse: BSC - news - people ), facing possible investor lawsuits over the implosion of two of its mortgage-laden hedge funds, severe pressure on revenues because of its exposure to the home and leveraged loan markets, and a possible bond-rating downgrade, says it’s weathering the storm.

Bear Stearns has been in the financial news lately and not in the best of ways. It seems that two of Bear Stearns’s hedge funds ran into such heavy losses with the collapse of the until recently popular carry trade in Japanese Yen that they had to be liquidated. That’s quite a blow to one of Wall Streets most well known and up to now successful investment banks.

That may only be the tip of the financial iceberg with more bad news to come. It seems like Bear Stearns has stopped redemption’s in a third hedge fund. Now it has received a credit warning from Standard and Poors.

While not yet a certainly the prospects for a global credit crunch from the wreckage of two Bear Stearns hedge funds and the rising sea of loans gone bad in the sub prime housing leading market makes the possibility all too real.

Under Allan Greenspan interest rates were set at artificially low rates for a long period of time. The widespread availability of easy credit at low rates caused lenders to lend money to millions of folks who are not having difficulties in paying it back.

As anyone in the United States well knows who eats or drives an automobile prices have began to advance at a rapid rate. Grocery prices especially are beginning to hurt the consumer as the prices for milk, meats, and vegetables reach record highs.

While the government still tells us that inflation is under control they conveniently leave the costs of energy and food out of the CPI index. Clearly your government considers all American consumers as idiots when they expect you to believe the official CPI numbers.