All will depend upon two actors: the FED and the Administration/Congress.

The seeds of fear have been deeply planted. While many in the financial and general media have assiduously watered and fertilized these fears, there can be no question of assigning blame to these actors for PLANTING the seeds and allowing them to flower and pollinate to the point where it will require vastly more substantial efforts to douse them than would otherwise have been the case.

The seeds of fear were planted by commercial and investment banks, savings and loans, and mortgage brokers. These seeds, of course, were the issuance of huge quantities of sub-prime mortgages and the securitization and dissemination of same throughout the financial world.

It is critically important to bear in mind that the "landlords" on whose property the subprime monstrosity was planted and harvested were the Federal Reserve and the Administration (Clinton/Bush)/Congress. The landlords wilfully averted their eyes and allowed these "agricultural" activities to go on for a decade, doing nothing until the harvest had been "processed" and the poison spread through the financial body politic to the point where the patient was at risk of losing vital functions.

Now, as the Good Book sayeth, "Ye shall reap what ye have sown."

Without question the great surprise of 2007 was the eruption of the Sub-Prime Crisis.

The second greatest surprise was the mind-boggling incompetence demonstrated by the FEDERAL RESERVE. The Bernanke FED was apparently absent when the crisis materialized. Judging from their non-response and their reiterated assertions that all was well, and that the main issue was how to manage growth and contain inflation in 2008, we presume that they were reposing comfortably on CLOUD NINE when the crisis hit. It took a totally "unexpected" worsening of the crisis, benchmarked by the freezing up of key credit markets and a sudden and acute distress in the banking system to jolt the FED from its trancelike state. Then it took many weeks for the OVERLY WELL-INSULATED FED to move from its foggy state to some semblance of awareness that something serious was afoot.

In a post we published last August 23rd in the wake of a $2 billion purchase of a specially issued class of Countrywide stock by Bank of America, we penned a piece entitled: "Now that Bank of America has Rescued Countrywide, Who Will Rescue Bank of America?" At that time, the media was filled with recountings of FED, Treasury, and Wall Street assurances that the credit crisis was well in hand, the worst was over, etc etc.

At the time we posed our very serious warning, Countrywide stock was selling in the mid-20s. Yesterday, the stock closed at 5.47. A nice 80% decline.

Bank of America stock was going for about 50 bucks on August 23rd. Yesterday it closed at 38.41. This constitutes a nearly 25% decline. This is hardly small potatoes for a blue chip mega-bank, the largest bank in America and a supposed cornerstone for conservative portfolios.

And now?

We remain bearish.

Well folks, the gurus are talking up a storm this morning. Why then, you might be inclined to ask, is this day different from any other day?

It is different because today, for a change, it is INTERESTING. Of particular interest are the pronunciamentos ex cathedra issued by three noted, if not notable figures: Treasury Secretary Paulson, President of the Philadelphia Federal Reserve Bank Plosser, and PIMCO bond fund chieftain Gross.

The principal obstacle to the government providing significant relief to the hardpressed banking system, to frightened mortgagees, and to the overall economy is, of course, George W. Bush. Mr. Bush -- who we believe has done a very fine job in certain areas of national policy -- is at a bit of a loss when it comes to the economy. The President seems to be uninterested in this admittedly tedious topic. He has made it clear repeatedly that the "Great Things" he aspires to accomplish lie primarily in the foreign policy/national security realm. There is, of course, absolutely nothing wrong in this. Indeed, after the wretched fumbling and endless hesitations and pussyfooting around by the preceding Administration, he has, in our view, provided a much-needed antidote.

A president, however, must also act in the realm of economic policy, even if his knowledge of and interest in same is de minimus. It will hardly suffice to advocate additional tax cuts and reliance on the enterprise of the private sector during a period of acute financial crisis. We sense in the President a residual fondness for the "liquidationist" attitude of the Hoover Administration. Ideological predilections and the IMMEDIATE self-interest of financially powerful interest groups need to be set aside during periods of heightened economic risk, when the latter is produced by a liquidity crisis.

Well folks, we confess: we are weary of reading endless, daily paeans to the glory of the 401K. Let us place our cards on the table at the outset: we regard the 401K "solution" to the retirement problem as a SHAM.

The endless genuflecting before the idol of the 401K constitutes a case of analytical deflection, motivated by a desire to draw attention away from the shift of wealth from employees to corporations, as well as the plenitude of pain for future generations of retirees the 401K "solution" portends. It would not do for corporate America to acknowledge that in placing responsibility for retirement saving and investment decision-making on the shoulders of those ill-equipped to impose stringent self-discipline and make difficult investment decisions, it has not only insured the indefinite fattening of its own bottom line at the expense of its employees, but has simultaneously consigned most of the latter to "golden years" whose hallmark will be poverty. Obviously, no one can live above the subsistence level on the pitiful payments of Social Security, even if latter are not cleverly parsed by "inflation-adjustment" measurement changes or other means.

We have, on many occasions over the years, pondered the question of the debt overhang in this country. The growth in debt in this country has been a process which has been going on since the trough of the Great Depression. Indeed, the trough level of the depression served as the baseline from which first recovery, and then, despite the secondary recession in the late '30s, secular growth rose. While there were certainly a number of factors which played a role in this long-term growth story, the secular growth in debt was a key factor. It was deficit spending -- government spending financed by rising government indebtedness -- which lifted us out of the depths of the depression. This Keynesian stimulus had solid but limited effect -- probably because it was too limited, and because the Roosevelt Administration backtraced, seeking in the late '30s a balanced budget. This, of course, required a reduction in deficit spending. The 1937-1938 recessionary economy was the consequence.

This morning, as all of us connected folk know, there is lots and lots of market "turmoil." Prices are plunging, talking heads are yakking, the tape is MOVING. We would like to offer a multiple choice test this morning.

Question #1. Who is Selling?

(a)The smart money
(b)The dumb money
(c)Dunno

Question #2: Who is Buying?

(a)The dumb money
(b)The smart money
(c)The specialists, who have to buy to maintain an orderly market
(d)Dunno

Folks, the quiz is over. This is a self-scoring test.

Well folks, they are at it again. The inflation-phobes are rushing to the ramparts to defend the embattled central banks -- particularly the Federal Reserve and the European Central Bank (ECB) -- from the threatening depredations of the recession-fearers. (Or, as a late American president might have put it -- the "nervous nellie's". Come to think of it, a former Vice-President's verbal coinage might be even cuter: the FED and the ECB must not surrender to the "nattering nabobs of negativism").

This is but the latest chapter of an old, old story. It is the story of dear money versus cheap money, a story which has haunted the economic history of the United States at least since the Whiskey Rebellion of the 18th century.

In an attempt to remove ourselves from the sound and fury of the current market agitation, we notice the very interesting juxtaposition of two quantifiable facts:
1. Fear levels, as measured by a variety of generally reliable statistical gauges, are continuing to register extremely high levels, with some recording the highest levels in almost 30 years;
2. Statistical measures of "smart money" -- particularly of Insider transactions -- are registering extremely high levels as well.

Unlike our illustrious former Fed Chairman, we will decline to label this a "conundrum." We think the statistics speak for themselves. (Please forgive us, George Santayana).