The Worst Crisis Since the Great Depression is Unfolding – Slowly But Surely

July 18, 2010

http://www.munknee.com/2010/07/draft-worst-crisis-since-the-great-depression-parts-1-2/

It’s easy to lose perspective on where the global economy stands – to be confused by the daily deluge of information – so let’s look at the big-picture of where we are today. As an investor it can mean the difference between making and losing a lot of money. So let’s take a look and see where we are at and what events are unfolding - slowly but surely.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from the Bryan Rich’s (http://www.moneyandmarkets.com) original articles* for the sake of clarity and brevity to ensure a fast and easy read. Rich goes on to say:

We have endured the sharpest fall in global economic activity since the Great Depression and one of the most threatening financial crises ever and, according to studies by the IMF, recoveries of past recessions with these dualities tend to be longer and slower than normal recoveries — typically around five years until economies sustainably resume trend growth. That means, if you mark the start of the recent crisis as late 2007, we’re less than three years in! Therefore, we should expect more bumps in the road ahead. Furthermore, history also shows us that financial crises are generally followed by sovereign debt crises, which is where we are now.

The 4 Stages of Sovereign Debt Crises:

Stage #1 - Burgeoning Deficits:

In a financial crisis government spending increases dramatically in attempts to stabilize the financial system and stimulate economic activity. Tax revenues fall, fiscal surpluses turn into deficits and economies with existing deficits keep piling it on – and that is just what is unfolding now.

The leading economies of the world have all seen their deficits shoot higher, some to record levels. In fact, the deficit spending that’s gone on in recent years can be summed up as follows: Over 40 percent of world GDP comes from countries that are running deficits in excess of 10 percent.

Stage #2 - Ballooning Debt:

When economies are contracting or even growing slowly, bringing these deficits back down to earth becomes an unenviable challenge. Governments have to make ends meet by turning to the markets. Then those burgeoned deficits turn into growing debt loads – and that is just what is unfolding now.

When debt reaches 80 percent of GDP threshold, the borrowing costs for governments starts ticking higher and so does the market scrutiny. The IMF says five of the top seven developed countries in the world will have debt levels exceeding 100 percent of GDP in the next four years.

Stage #3 - Credit Downgrades:

When deficits and debts rise and economic activity appears unlikely to curtail fiscal problems, the credit worthiness of the government falls under intense scrutiny. That’s when we see downgrades – and that is just what is unfolding now.

Greece’s sovereign debt rating has been downgraded to junk status. Spain has lost its AAA rating and the UK could lose its AAA status if its deficit isn’t addressed. Japan’s outlook has been cut to negative and rating agencies have even warned the U.S.

Stage #4 - Sovereign Debt Defaults:

This is the final and most deadly stage because downgrades only make the vicious cycle of weak economic activity and growing dependence on debt worse. When investors see more risk, they require more return [and, as such,] the borrowing costs for these troubled countries rise. Then it becomes harder to finance spending needs and harder to finance existing debt and that’s when we see defaults – and that is on the verge of unfolding.

When S&P downgraded Greece to junk status, it warned debt holders [that they] should be prepared to receive just 30 cents on the dollar… [in spite of the] $1 trillion rescue package committed by the EU and IMF. [Then there is] Spain, an economy that represents 12 percent of GDP for the euro zone, [which is] rumored to be next in line for a massive funding request.

In sum, a sovereign debt crisis has arrived – the fuel for contagion is fear – and unless governments can demonstrate they’re willing to take tough steps to reign in debt this crisis can spread quickly.

Currenncy Crises Are Likely Next:

History shows us that financial crises tend to be followed by sovereign debt crises – and that sovereign debt crises tend to lead to currency crises, i.e. a loss of confidence in countries’ currencies which is something we’ve seen very clearly in recent months with the euro. A study from MIT on historical currency crises lays their progression out as follows:

The Three Stages of a Currency Crisis:

Stage #1 - Loss of Confidence:

The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued – and when the euro zone stepped in and threatened to cough up $1 trillion dollars in an attempt to save the euro monetary union, it was a conscious decision to devalue the euro.

Stage #2 - Herding Mentality:

When it’s thought that investors are moving out of a currency, others follow. [A case in point is the euro which] currently is being shorted [moreso than ever before in history] and when the market is heavily positioned one way — and the fundamentals support it and an intentional devaluation appears underway — big institutions have to react. Put simply, they have too much to lose by getting caught the wrong way. As such, for example, Iran’s central bank has announced they will be diversifying euro exposure by trading into gold and U.S. dollars while China and the UK have shown a significant increased interest in owning U.S. dollars as opposed to euros.

Stage #3 - Contagion:

Contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses. A crisis that started in Dubai now confronts Greece, Spain, Portugal … and will likely spread to the UK, Japan and even the U.S.

Conclusion:

The day-to-day ebb and flow of economic data and news can be distracting. That’s why it’s important, especially with all that is going on, to keep the big picture in perspective. History shows us that a global recession when combined with a financial crisis tends to stifle economic activity longer than normal recessions. History also shows us that financial crises tend to lead to sovereign debt crises, which tend to lead to currency crises so, with that in mind, it’s fair to say that a V-shaped economic recovery has always been very unlikely.

We are going to see more shocks to the global economy, more challenges and more investors fleeing risky investments in favor of safe havens. [Got gold?]

Fed Strikes More Cautious Tone On Recovery, Noting Risks Overseas; Holds Rates At Record Lows:

http://finance.yahoo.com/news/Fed-strikes-more-cautious-apf-2953770810.html?x=0&sec=topStories&pos=4&asset=&ccode=

Jeannine Aversa, AP Economics Writer, On Wednesday June 23, 2010, 5:35 pm EDT

WASHINGTON (AP) -- The Federal Reserve struck a more cautious tone about the strength of the U.S. economic recovery, indicating Europe's debt crisis poses a risk to it.

Wrapping up a two-day meeting Wednesday, the Fed in a 9-1 decision retained its pledge to hold rates at record-low levels for an "extended period." Doing so is intended to energize the rebound.

The Fed expressed confidence that the recovery will stay intact despite threats from abroad and at home. But Chairman Ben Bernanke and his colleagues offered a slightly more reserved outlook than the last time they convened.

The Fed said the economic recovery is "proceeding." That was a bit less upbeat than the view at the April meeting when the Fed said economic activity continued to "strengthen." The Fed also said the labor market is "improving gradually."

While not mentioning Europe by name, the Fed said "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad."

The fragile economic picture increases pressure on President Barack Obama and lawmakers in Washington. Near-double-digit unemployment is certain to factor into the way Americans vote in congressional midterm elections this fall. If it fails to come down after that, the jobless rate could play a significant role in the 2012 presidential election.

At the same time, the president has limited options. Congress has run into opposition on extending unemployment benefits and providing more aid to cash-strapped states. While some liberal Democrats maintain that government spending is the best way to stimulate the economy, a growing number of moderate and conservative Democrats share Republican concerns that the government's exploding budget deficits pose a greater risk.

The subtle shift in the Fed's outlook drew little reaction from stock investors. The Dow Jones industrial average was essentially flat after announcement.

The decision to keep rates at record lows boosted demand for safe-haven assets like Treasurys, sending interest rates lower. The yield on the 10-year Treasury note, a widely used benchmark for mortgages and other consumer loans, fell to 3.13 percent from 3.25 percent late Tuesday. The 10-year note hasn't closed at that level in more than a year. Rates had already fallen earlier in the day after the government said new-home sales dropped 33 percent last month.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the fourth straight meeting was the sole member to dissent from the Fed's decision to retain the "extended period" pledge.

Hoenig fears keeping rates too low for too long could lead to excessive risk-taking by investors and feed new speculative bubbles in the prices of stocks, bonds and commodities.

He's also expressed concern that low rates could eventually unleash inflation. And Hoenig said he worries that keeping the "extended period" pledge will limit the Fed's stated "flexibility" to start modestly bumping up rates.

Given the risks to the recovery, the Fed left a key bank lending rate at between zero and 0.25 percent. The rate has remained at that level since December 2008.

That means rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans will remain low. Commercial banks' prime lending rate would stay at about 3.25 percent, the lowest point in decades.

Low rates serve borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.

Still, if the rates spur Americans to spend more, they would help invigorate the economy. That's why the Fed maintained its pledge, in place for more than a year, to keep rates at record lows for an "extended period."

Because the fragile recovery is more vulnerable to shocks, from home and overseas, economists increasingly say the Fed probably won't start boosting rates until next year -- or possibly into 2012. That's a change from a few months ago, when economists thought the Fed would begin raising rates at the end of this year.

"Increased market volatility and uncertainty on the economic outlook may cause the Fed to delay raising rates until well into next year," said Kurt Karl, chief U.S. economist at Swiss Re.

The Fed has leeway to hold rates at record lows because inflation is essentially nonexistent. In fact, the Fed noted that the price of energy and other commodities have dropped in recent months, and that underlying inflation has "trended lower." That seems to suggest that Fed policymakers are a bit more concerned about the remote prospect of deflation, versus inflation.

T.J. Marta, a market strategist at Marta on the Markets, called the Fed's policy statement "more dovish" and reinforces the belief that the central bank won't need to start boosting rates any time soon to fend off inflationary pressures.

After suffering the worst recession since the 1930s, the economy has been growing again for nearly a year. Manufacturing activity is picking up. Businesses are spending more. And Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession.

Still, the strength of the recovery could be affected by the European debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment.

If the U.S. recovery were to flash signs of a relapse, the Fed would likely take other steps to get it back on course. The Fed has left the door open to resuming purchases of mortgage securities, a move that would drive down mortgage rates and bolster the housing market. It ended a $1.25 trillion mortgage-buying program in March.

Market Decline Based On More Than Fear:

Comstock Partners, Inc.
May 20, 2010

http://www.comstockfunds.com/default.aspx?MenuItemID=29&&AspxAutoDetectCookieSupport=1

Today marked a new phase in investors' understanding of the EU crisis. Although the Euro itself recovered a bit, investors realized that Europe's problems could spread to the U.S. and impede or stop its economic recovery. This would possibly mean that the 14-month market rebound in U.S. stocks may not have been justified. The possibility is more than just a fear, but a realistic assessment of a dire situation. Even if the EU and the Euro survive, all of the member governments, including the relatively stronger ones, would have to undertake severe spending cuts and pay down debt to rectify their budgets. These actions would lead to a long and serious economic slump that would most likely spread across the globe.

The crisis is also reminding investors that we have undergone two 50% plus market declines in the same decade and that the S&P 500 today closed at same level it first reached over 12 years ago in mid-March 1998. The two major declines are a reminder to traders of the benefits of getting out relatively early, while the lack of progress over 12 years make long-term investors wonder what they doing in the market. For those who didn't get out on time at the tops in early 2000 and late 2007, the bell is ringing for a third time.

The potential impact of the European crisis on the American economy and markets is not just Comstock's opinion. In testimony before a Congressional committee yesterday, Fed Governor Daniel Tarullo stated that sovereign debt problems in "peripheral" Europe could spill over and cause problems throughout Europe that, in turn, could be transmitted to global financial markets. This, he said, could cause banks and other financial institutions to pull back on lending as they did following the Lehman bankruptcy. "The result could be another source of risk to the U.S. recovery in an environment of still-fragile balance sheets and considerable slack".

The Fed's minutes of its last meeting, released this week, indicated that the economy was not doing quite as well as advertised, even before the impact of Europe's problems. Attributing the recent increases in consumer spending to temporary factors and a lowered savings rate, they concluded that it was unlikely that consumer spending would be the major factor in driving economic growth. They added that the housing market appeared to have flattened despite major government support and that both sales and starts had stalled at depressed levels. They also saw the possibility of increased foreclosures adding to already bloated inventories of vacant homes, threatening a downside risk to prices. The minutes mentioned that commercial real estate continued to fall as a result of deteriorating fundamentals, while bank lending was declining and credit remained tight.

Other recent economic releases were also not encouraging. The Mortgage Bankers Association (MBA) reported a record 4.63% of mortgages in foreclosure in the first quarter with combined foreclosures and delinquencies amounting to 14% of all mortgages. We note that this is before an expected surge of new defaults and foreclosures as a result of foreclosures being delayed due to attempted workouts and the pending increase of adjustable-rate mortgages due for reset in coming months. In addition applications for new mortgages for home purchases plunged in the week following the expiration of the latest home buyers' tax credit. It was also reported today that initial weekly claims for unemployment insurance unexpectedly jumped to 470,000. While one week doesn't necessarily mean anything, we note that claims have now been flat since year-end, indicating that the labor market still remains weak.

We would be remiss if we didn't mention increasing concern about China as a negative market factor. The Chinese housing market has been booming, and the authorities have been slowly tightening monetary policy. In the first quarter the nation reported its first trade deficit since 2004. If the Chinese economy slows down at the same time that Europe is dealing with its crisis the U.S. and global economy will stall. This is already being reflected in a sudden decline in commodity prices on anticipation of a drop in Chinese purchases. We'll have more on this topic in subsequent comments.

In our view the 14-month rally since March 2009 is over and a major decline is underway. The recent decline has been extreme in the short-term, and some sharp rallies are likely. However, we believe that none of these rallies will hold and that the eventual market bottom will be far lower than today's level.

The Government as Identity Thieves:

Dr. Ron Paul Tuesday, May 18, 2010

http://www.thedailybell.com/1056/Ron-Paul-The-Government-as-Identity-Thieves.html

The spotlight remains on the Greek sovereign debt crisis as the riots continue. The terms of the Greek bailout from the IMF and Eurozone countries remain contentious with citizens on all sides. Europeans hate having their governments throw public money away as much as Americans do. The Greeks are not happy about having their taxes raised while their pensions and salaries are cut. Meanwhile, it is rumored by the Financial Times, AFP and others that Greece may spend more than it saves from austerity measures on arms deals with Germany, France and the US as a potential condition of receiving bailout funds. If true, it is certainly not unprecedented for the global military industrial complex to benefit from deals made by their friends in the central banking community. After all, war is the health of the state. The last thing big government proponents want is for peace to break out in the world.

This free flow of fiat money from around the globe to Greece will not really save Greece as much as it will grant a temporary reprieve to central bankers from the consequences of their mistakes. Sadly, this will come at the expense of the Greek people and taxpayers in Europe and America. Taxpayers are of no consequence to either European or American central bankers. Even the mere desire for complete information on what they are up to in our name is rebuffed, as we saw last week in the Senate with the failure of Senator Vitter's amendment containing my language to fully audit the fed. The hubris of powerful and secretive central bankers seems to know no bounds.

If someone incurred debts against you as an individual, without your knowledge or consent, you would call it identity theft. You would call your bank for a full accounting of the debts incurred in your name, and after some verification, those debts would be declared invalid and you would not be held responsible for them. Furthermore, if the culprit was found, they would be prosecuted and sent to jail.

Not so with governments and central banks. Governments that are supposed to be of the people and for the people routinely incur debts against the people. Some governments even borrow money to oppress their citizens, and then expect them to pay for their own oppression with interest. With a fiat monetary system, the sky is the limit for how much debt a government can place on the backs of the people.

We have reached the point in the United States where the debt our government has accumulated against us is mathematically impossible to pay off. Harder times, likely due to a wave of hyperinflation, will eventually find its way to our streets and I am fearful of how Americans will react. My hope is that we will come together peacefully and help each other, and that enough of us will be aware that the blame rests securely on the shoulders of the Federal Reserve and the special interests. They should not be looked to for salvation. They should not be given more power. Rather, they should be stripped of the powers that allowed them to create this mess in the first place.

Resistance to public transparency regarding public debts should be denounced in the strongest of terms, and the central bankers that incurred them should be seen as no better than common identity thieves.

High Frequency Terrorism: How the Big Banks and Federal Reserve Maintained Their Death Grip Over the United States:

By David DeGraw & Max Keiser, AmpedStatus Report
Posted on Monday, May 10th, 2010 at 1:11 am

http://ampedstatus.com/high-frequency-terrorism-how-the-big-banks-and-federal-reserve-maintained-their-death-grip-over-the-united-states

The following article is the third-part of a six-part report titled: “The Financial Oligarchy Reigns: Democracy’s Death Spiral From Greece to the United States.” The full report is available here:

http://ampedstatus.com/the-financial-oligarchy-reigns-democracys-death-spiral-from-greece-to-the-united-states

III: Financial Terrorism Operations: 9/29/08 & 5/6/10

In the aftermath of Goldman Sachs’ public flogging before the world in Congress, and while under investigation, on the very day that Congress was voting on the “break up the too big to fail banks” amendment and cutting behind the scenes deals to gut the audit of the Federal Reserve, the stock market had its greatest sudden drop in history, plummeting 700 points in ten minutes - shades of September 29, 2008 all over again.

If you recall, back in September ‘08, as Congress was voting down the first bailout, the big banks made the market plunge a record 778 points in one day, fear and panic then led Congress to pass the bailout. Trillions of our tax dollars, the money that we desperately need to keep our society functioning over the long run, then went out the window and into the pockets of the very people who caused the crash.

What happened on September 29, 2008 will go down in history as one of the greatest acts of terrorism ever.

9/29/08 proved that when you have so much power concentrated in the hands of a few, you can manipulate a computer algorithm and make the market and economy go which ever way you want it to go. So on 5/6/10, just as the power of the big banks was threatened again on the floor of the Senate and a deal on auditing the Federal Reserve was being negotiated, in came a sudden and unprecedented ten-minute 700 point market drop. A precision-guided High Frequency Trading (HFT) attack to show Congress who’s boss.

If you think the massive sudden drop happened because one lowly trader hit one wrong button, if you actually believe that the entire stock market can plunge because of one mistaken key stroke by a low level trader, you are stunningly naïve. I hate to burst your bubble, but this was a direct attack.

In a market where 70% of all trades are executed by computer algorithms via High Frequency Trading (HFT), Goldman Sachs has the power to make the market crash or rise at will. In fact, Goldman has a major Weapon of Mass Destruction in its Program Trading monopoly of the New York Stock Exchange, as Tyler Durden described on Zero Hedge:

“Goldman’s dominance of the NYSE’s Program Trading platform, where in addition to recent entrant GETCO, it has been to date an explicit monopolist of the so-called Supplementary Liquidity Provider program, a role which affords the company greater liquidity rebates for, well providing liquidity, and generating who knows what other possible front market-looking, flow-prop integration benefits. Yesterday [5/6/10], Goldman’s SLP function was non-existent. One wonders - was the Goldman SLP team in fact liquidity taking, or to put it bluntly, among the main reasons for the market collapse….

… here is the most recently disclosed NYSE program trading data….

What is notable here is that of the 1.4 billion in principal shares, or shares traded for the firm’s own account, Goldman was the top trader by a margin of over 100% compared to the second biggest program trader.

We have long claimed that Goldman is the de facto monopolist of the NYSE’s program trading platform. As such, it is certainly the case that Goldman was instrumental in either a) precipitating yesterday’s crash or b) not providing the critical liquidity which it is required to do, when the time came. There are no other options.”

For further investigation, I turned to Max Keiser, who has written and authored similar Program Trading and HFT computer algorithms. I asked him if he thought this was an attack, here is what he had to say:

“May 6th was an unequivocal act of domestic financial terrorism in America. A day that will live in infamy.

To scare the lawmakers, themselves large owners of the very banks and stocks that they are supposed to be regulating, a financial Weapon of Mass Destruction was put to their head and they acquiesced.

As the inventor of the continuous double-auction, market-making technology (VST tech. US pat. no. 5950176) that is referenced 132 times by program trading and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the gang simply pulled the ‘buys’ from their computer trading programs and manufactured a crash. And when the coast was clear, and it was clear the politicians were not going to vote for anything that would break up the ‘too big to fail’ banks; all the ’sells’ were pulled from the computers and the market roared back.

This is a Manchurian Candidate market where program trading bots start the ball rolling in whatever direction Wall St. wants the market to go - and then hundreds of thousands of day-traders watching Cramer on CNBC jump on the momentum bandwagon and commit the crime for the Wall St. financial terrorists, who then say, ‘It wasn’t us, it was ‘the market!’”

On Friday, the next day, after the “break up the too big to fail banks” amendment was soundly defeated by a 61 to 33 margin in Senate and a deal was struck to eliminate key provisions from the audit of the Federal Reserve bill, Goldman was meeting with the SEC to work out a settlement in their case against them. Once again, Goldman proves that crime pays. Welcome to the New Mafia World Order.

Other than the two major operations carried out on 9/29/08 and 5/6/10, we must also recall a smaller attack on January 21st and 22nd of 2010, when Obama had a press conference and came out in favor of the Volcker Rule, which would have limited these HFT and “proprietary trading” schemes. At that time, the market dropped 430 points. Soon after this attack, all follow up talk on the Volcker Rule faded away and this reform has not been seriously addressed by Obama since then.

The bottom line, the United States has been taken over by a financial terrorism network. Let’s face it, we are all hostages of these financial terrorists and our puppet politicians rather be in on the scam than defend our interests. If these terrorists don’t get their way at all times, they have the power to throw their tremendous weight around and turn millions of lives upside down in a matter of minutes, and as they have shown they have no hesitation in executing that power, no matter how many millions of lives they destroy.

They set off this crisis with a wave of bombings in their initial Economic Shock and Awe campaign two years ago, resulting in massive devastation. Just to name a few of their greatest hits within the U.S.:

* 50 million Americans are now living in poverty, which is the highest poverty rate in the industrialized world;

* 30 million Americans are in need of work;

* Five million American families foreclosed upon, 15 million expected by 2014;

* 50% of US children will now use a food stamp during childhood;

* Soaring budget deficits in states across the country and a record high national debt, with austerity measures on the way;

* Record-breaking profits and bonuses for themselves.

Like other terrorists, they don’t use IEDs, they use CDOs. They don’t use precision laser-guided missiles, they use High Frequency Trading. They don’t have WMDs, they have derivatives. Let’s also not forget that they have toxic assets and dirty debt bombs just waiting to be deployed upon the American public once there is any true growth in the economy. Their nuclear arsenal includes hundreds of Trillions in secretive derivatives and hidden debt bombs, just ticking away, waiting to be set off… at their whim...

"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.

Wharton: If Spain Goes Down, The ENTIRE Global Economy Is In Trouble:

http://www.businessinsider.com/wharton-if-spain-goes-down-the-entire-global-economy-is-in-trouble-2010-3

Vincent Fernando, CFA
Mar. 18, 2010, 6:36 AM

Wharton is warning markets to keep a very close eye on Spain right now. That's because while a Greece or Portugal financial meltdown might be manageable, a Spanish one could have massive negative repercussions for both Europe and the global economy.
This is due to the massive size of both Spain's economy and debt:

If Spain fails to execute a credible plan to cut its budget deficit, the worries over sovereign solvency will spread quickly beyond the small, peripheral countries currently making the most headlines, experts warn.

A Spanish default could herald the breakup of the euro and a rise in retaliatory protectionism around the world.

According to an analysis by consultants at McKinsey, the sum of Spanish government, corporate and household debt relative to the size of the overall economy surpasses all developed countries except the U.K. and Japan. Correcting the imbalance has grave implications for the public purse.

For that reason, observers worry about Spain's ability to service its debts. Bailouts of Greece and Portugal, if necessary, would be "not inconsequential but manageable," according to Witold Henisz, a professor of management at Wharton. The EU-led rescues would probably knock tenths of percentage points off of European growth, he adds. It's a different story with Spain.

The need for a Spanish bailout could drop us into a second phase of the global financial crisis, one where the euro could end and the world could entrench into deadly trade-destroying protectionism:

Italy, for example -- facing default as they became unable to fund budget deficits. The viability of the euro currency would come into question, as the union's stronger members could eventually refuse to prop up weaker members and decide that their destiny would be better served by monetary independence.

Spanish officials' lashing out at indistinct foreign culprits is a precursor of what to expect, Henisz says. The risks of a "spiral into protectionist isolationism" would rise. "Political parties that espouse nationalism and xenophobia could get some serious purchase under these conditions."

Check out the video from Wharton below...