"Your Big, Fat-Fingered Debacle" (Collapse):

By Randall W. Forsyth

http://online.barrons.com/article/SB127320706419088061.html?mod=googlenews_barrons

YOU KNOW IT'S A BEAR MARKET when the Dow Jones Industrials end down 348 points and traders breathe a sigh of relief.

The collapse is blamed on computers, but that misses the point. Debt deflation is unabated by the ECB.

At its low Thursday, the Dow was gripped with a thousand points of fright as the result of an apparent "fat finger" trade that, according to numerous stories circulating around the market, entered a sell order for billions when it was supposed to be for millions.

The stock in question supposedly was Procter & Gamble (PG), which was trading steadily around 62 until it collapsed to as low as 39.37 in a flash before rebounding almost immediately and closed at 60.75, down 1.41 or 2.27%, which is bad enough. But consider Accenture (ACN), which went from over $40 to a mere penny in the same flash before recovering to 41.09, for a loss on the session of 1.08 or 2.56%.

Some of these errant trades will be cancelled. Trades that were more than 60% above or below levels at 2:40 PM EDT will be cancelled, Nasdaq said late Thursday. Yet that doesn't compensate all that was lost in this fiasco.

I'm not talking about the $1 trillion of market value that evaporated in the past three sessions. That's based on the Wilshire 5000, the broadest measure of the U.S. stock market, which reflects closing prices.

But ordinary stock investors were directly affected by the mindless selling of stocks by electronic, high-frequency trading algorithms that reacted to the sudden plunge in the market.

Limit orders to buy stocks at below-market prices were executed, which got bargains for buyers. Conversely, sellers got correspondingly lower prices.

For instance, an investor who might have placed a stop-limit order (which gets triggered if a stock drops to a certain price to limit losses) would have had that order executed unexpectedly. But it wouldn't be because of a fundamental market drop but a computer gone wild. (I know, because it happened to me.)

Thursday's thousand-Dow point fiasco is just another black eye for Wall Street at a time it is already under attack.

After Congressional hearings with bewildering references to CDS, CDO and all manner of mind-bending market arcana, the bizarre swings seen on a day such as this only confirms Washington's and Middle America's worst suspicions about Wall Street.

Instead of being a provider of capital to finance growth of the great American economy, days like this make Wall Street seem as if it is nothing but a casino. And as with all casinos, it seems one that is designed to separate the customer from his money.

Yet even after the near-thousand-point drop was reversed, the major U.S. averages were still down more than 3% and holders of equities $1 trillion poorer than three days earlier. Something more than fat fingers is afoot.

"Those losses, led by financials, were no glitch, but a clear reflection of the fact that sovereign debt woes due to indiscriminate Keynesian deficit spending is outrunning tepid global recovery and threatening the next financial blowout," asserts Uwe Parpart, Cantor Fitzgerald's chief economist and strategist for Asia.

"A machine or bad entry may have been the catalyst, but the scene was set for a big fall," he continues. "The fact that gold prices jumped and barely came back down; that the euro dropped one big figure [that is, more than a full cent against the dollar] and stayed down; that oil tanked -- and all that accompanied by a sharp unwinding of carry trades…amply proves the point."

The unwinding of carry trades was evident in a sharp drop in the Australian dollar's cross-rate against the yen, Parpart points out. Carry trades involve buying high-yielding assets, such as those in Aussie dollars, with borrowings in low-yielding currencies, in this case Japanese yen.

It could also be in dollars. And the unwinding of carry trades means buying greenbacks to repay those borrowings. As a result, the dollar soared further against the euro, with the common currency plunging below $1.27 amid continuing protests in Greece and the European Central Bank's stand-pat policy position.

Not surprisingly, the flight to quality accelerated, with Treasuries soaring again and yields plunging to 2010 lows. The benchmark 10-year note yield ended at 3.40%, down sharply from 4% a month ago. The popular way to play long Treasuries, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) gained over 3% Thursday and is up over 10% from a month ago.

But corporate credits decoupled from Treasuries amid continued stresses in the money markets, especially the European interbank markets. The iShares iBoxx $ Invesment Grade Corporate Bond ETF (LQD) fell 1.65% while Treasuries were soaring. Liquidity in the corporate bond market is diminishing, Loomis Sayles' veteran bond manager Dan Fuss said at a mutual-fund conference Thursday.

Beyond the monster, momentary glitches that sent the equity markets into freefall momentarily, it is the reemergence of the credit stresses that were at the core of the 2008 meltdown that is important.

In 2008, that was the result of funding difficulties by institutions left on the hook for errant credit decisions. In the case of Lehman Brothers, the U.S. authorities claimed they didn't have the power to step in to stop the panic resulting from its collapse. When it came to AIG, they found the necessary authority to stanch the bleeding.

Ultimately, the federal government came to the fore with the much-criticized TARP, or Troubled Assets Relief Program. The Federal Reserve followed with its massive purchases of Treasury, agency and mortgage-backed securities totaling $1.75 trillion. The recovery in the markets roughly dates from the March 2009 Federal Open Market Committee when that program, commonly referred to as quantitative easing.

Now, with civil unrest in Greece instead of the collapse of U.S. financial institutions, the ECB Thursday declined to take the same decisive actions that the Fed took in March of last year. For better or worse, the ECB refused to step in to monetize the debts of the beleaguered nations even as civil unrest continued in the Streets of Athens.

The aggressive actions to counter the credit crises in the U.S. and the U.K. have been roundly criticized on the Right and the Left of both countries.

British authorities worried about civil unrest had they let Northern Rock fail. The run on banks and especially money-market funds could have been destabilizing in the U.S. Moreover, the steps taken to counter the crisis by the outgoing Bush administrations were continued and extended by the Obama administration.

The lesson is this goes far beyond some computer glitches, fat fingers or other technical difficulties. And the Greek crisis is no more just a European problem than the subprime mortgage collapse was solely an American problem. In sum, to think that this is only a momentary downdraft is a delusion.