Thanks to Christoph for this story. Jim Rogers has been on the wires lambasting the Fed for pumping out cash left, right and center. He has called the bailing out of investment bank Bear Stearns as “socialism for the rich“.

I like that. He calls for the Fed to be abolished. Now we’re talking.

Let’s face it, market rally or not, the $ is still in serious trouble and banks are still going to be under severe pressure. Watch for the lawsuits to come flying out now. Charles Schwab is being sued for “untrue” statements regarding the diversification of certain funds. We are going to see this more and more as people start to take a closer look at the way investment products have been sold.

You could say this is an outcome of an asset bubble bursting. People rush round looking for someone to blame when they lose all their money. “Caveat Emptor”  is conveniently forgotten and another investment generation is left to learn the lessons that previous ones failed to pass on or more likely were ignored in their attempt to do so.

How do people feel out there? I know 95% of my readers are from the US so maybe you have had some first hand experience you would like to share.

After a chaotic few days the market has calmed as it awaits the next round of soothing medicine from the Fed. 100bps is expected now and anything less could see a major sell 0ff. So perhaps its time to recap on what’s happened:

- Global expansion of the money supply by the banking system abetted by loose regulation.

- Financial assets treated as investments.

- Trading on a leverage basis whether in the markets or in property.

- Reliance on capital gain to pay off debts.

- Creation of an asset bubble in property and stocks.

- New financial products promising spectacular gains.

A quick recap:

- Asset prices can go no higher as the mathematics of compound interest and cashflow catches up.

- The first domino falls as the sub-prime market starts to fall.

- Property finally turns and heads south in the US.

- Debts over run equity in houses.

- Spirals into derivative products causing a more widespread reaction.

- First reaction from Fed.

- Banks start to revalue (mark to market) loans.

- First run on a bank: Northern Rock fails.

- UK nationalises Northern Rock.

- General deleveraging starts as contagion spreads.

- Banks review lending and fringe financing companies fail.

- Rogue traders appear.

- Central banks provide copious amounts of liquidity.

- Fed cuts rates heavily and provides open lending to all.

- $ collapses and commodities explode as safe haven.

- Second run on an investment bank: Bear Stearns fails.

- Fed sort of nationalises Bear Stearns but gives it to JP Morgan under guarantee.

- Financial system on the verge of complete collapse.

So what now?

Well the Fed has studied the 1930s depression very carefully and realises that systemic bank failure is simply not an option. Yes shareholders will lose most of their money but that’s the risk with equity. The lines of credit and liquidity must be kept open and depositors must be kept afloat. If necessary banks in trouble will be taken over or have to merge.

It’s safe to say they will do whatever it takes, regardless of the cost. The clean up can come later but for now this is mainly about preserving confidence in the system.

How it pans out is impossible to predict but i wouldn’t want to own any banking stocks.

Bear Stearns finally ran up the white flag today and was forced to seek funds from JP Morgan for 28 days. These loans have been underwritten by the Fed essentially preventing Bear Stearns going under.

This was the moment of truth for the Fed. They blinked.

Now they have underwritten the US banking system they will have no choice but to support any institution that experiences similar problems. On one hand this is a prudent move as the implications of a bank failure are very serious but the sad fact is that in order for the market to recover from this era of cheap and funny money is to allow failure to occur.

So the taxpayer can now expect to pick up the tab for this party. It will be interesting to see if this spreads outwards from the US as the credit markets simply disintegrate.

Expect more official action next week probably involving currencies as well.

With the Dow already 250 points off the recent bounce and the $ hitting new lows against the Yen, Sfr and Euro, the time has come for the Fed to look at the $. Today even the President was moved to make some comments about strong dollar policy and importing energy inflation through a weak dollar.

The problem the Fed has is that the $ could really collapse here. $Yen is current at 101.15, a 13 year low give or take. That was when I was actually quoting the currency pair myself. Actually it has been down at these levels a few times but briefly. For the Japanese this is not helpful at all with exporters penciling in 113 for 2008. But the psychological effect of the $ breaking 100 against the Yen and 1.00 against the Sfr may well bring some serious fallout. The $ may well be booted into oblivion by all those on currency pegs to the $ who are certainly wondering whether or not to abandon them.

The question is whether intervention would do any good. Well it might and that may be all that is needed. There isn’t any good news for the US right now but then again its been one way traffic for 6 months now and for most of the last few years for the $. Is there any good reason to see it lower other than a complete disengagement by the market of the $.

The knock on effect in all markets could send the whole US financial system over the edge. A quick 5% appreciation in the $ against the majors as well as Aus, Cad and Nz would certainly help take the edge off the current situation. It may not save the $ in the long run but it would buy some breathing space over the next few months.

Will they do it? Well if they don’t you’d better hold on to your hats as carry trades get unwound.

With rumours continuing to circle around main street financial institutions in trouble, the Fed along with other central banks piled in another $200bln worth of liquidity in a vain hope to stem the tide. It certainly worked sparking a massive rally in the US market which was looking very weak indeed.

I wrote 6 weeks ago that the Fed would have no option other than to underwrite the whole financial system. This is exactly what they are doing. The worrying aspect of this approach is that it leads the market to depend on continuing liquidity to provide confidence and prevent what would be happening without intervention, namely a full scale rout with several institutions going under.

This creates extreme moral hazard. Even though many financial institutions have clearly acted irresponsibly and in some cases in other ways, they will not be allowed to fail unless a “deal” is worked out where they will be “acquired” quietly for a nominal sum and so the system stays solidly in place and the illusion is maintained.

F.William Engdahl lays out his thoughts on the origins of this mess. It’s focus is the US over the last 100 years and is interesting to read though he makes some strong accusations about the actions of certain people.  The extent to which small cliques have organised and run the financial system is open to questions but there is no doubt that the US prevailed at Bretton Woods on the strength of pure self-interest.

So what now? Well I would say more of the same. But gravity is a powerful force and its hard to imagine these markets not falling further and more de-leveraging taking place in credit and carry trades. I’ll discuss shortly what a new global currency system might look like because the current one is about to explode.

It reads like a Tom Clancy plotline: The Senate Select Committee On Intelligence gets briefed on the national security implications of a collapse in the $. Suddenly there is a realisation that the US is very exposed not just economically but politically. Those who have read “Debt of Honour” will be familiar with the plot which involves a crashing of the US financial system using a coordinated attack on the $ and the Treasury market. Alas this is now not fiction but real time.

The $ is being abandoned wholesale and the US intelligence service is right to be focusing on what this could mean for national security just as the Pentagon did when they commissioned a report on the security implications of climate change back in 2004.

With Gold heading towards $1000/oz, Oil above $100/bl, the $ in freefall and the financial system in a mess, one could be forgiven for thinking that things couldn’t get much worse. Well stock prices still have plenty of room to fall and probably another 10-15% is about right. Property will continue to sag also.

But the main problem is the US getting the big fat raspberry from the rest of the world. It’s stretched militarily, politically it’s pretty much lost all credibility and now economically its kaputski, as its Russian pals would say.

Who caused this mess? Well according to some it was Sir Alan. No not Alan Sugar of Asmtrad and Spurs fame but Alan Greenspan. This little piece on his actions in 1987 paints an interesting picture.

Let’s hope someone with half a brain is in charge back in Washington otherwise this could get very messy.