I know how to prevent deflation. Cut those rates.
I doubt cutting rates would be enough to offset the drop in demand that's been caused by taking sub-prime products off of the table.
Sub-prime zero-down, nodoc, liar loans and their relatives are history. Sub-prime products created demand which inflated prices. Sub-prime products are now GONE and the demand they created has gone with them. The market will have to adjust to these simple economic facts.
Besides, too many criminals still have their snouts buried in the trough and feeding them with lower rates would just make the problem worse.
Want to restore confidence in the mortgage backed securities being peddled on Wall Street?
Start making some arrests and drag the thieves out of the temple.
If I were the SEC, I'd be taking a real hard look at the FICO scores used to value those mortgage backed securities. I'd want to compare the scores returned by the reporting agencies against what was documented on the loans that got securitized.
But hey, that's just me.