from Doug Noland; snip:

‘The Wall Street Bust:
‘October 04, 2008

‘Importantly, this historic Credit Inflation inflated asset prices, incomes, corporate cashflows/earnings, government revenues, and various types of spending throughout the U.S. and global economy. It was a self-sustaining Bubble bolstered by ongoing Credit excesses, asset inflation and resulting purchasing power gains. But NFD growth slowed sharply to an annualized $1.726 TN during this year’s first quarter and then sank to $1.127 TN annualized during the second quarter. Credit growth is now in the process of collapsing.

‘At this point, there is clearly insufficient Credit expansion to support inflated asset markets; incomes and household spending; corporate cash flows and investment; and government receipts and expenditures. Lending markets are frozen, securitization markets broken, corporate and muni debt markets in disarray, derivatives markets in shambles, and the leveraged speculating community is engaged in panic de-leveraging. As a consequence, the over-indebted household, corporate and state & local sectors now face a devastating liquidity crisis.

‘We are today witnessing the Acute Stage of Bursting Credit Bubble Dynamics. It’s an absolute debacle, and there’s little our well-intentioned policymakers can do about it other then try to slow the collapse. … . ‘

‘… .

‘Over the years I’ve chronicled this historic Bubble in Wall Street Finance. It is worth recalling today that Wall Street assets began year 2000 at about $1.0 TN and ended 2007 at $3.0 TN. The ABS market surpassed $1.0 TN in 1998 and ended 2007 at $4.5 TN. GSE assets surpassed $1.0 TN in 1997 and ended last year at almost $3.4 TN. Agency MBS surpassed $2.0 TN in 1998 and closed 2007 at almost $4.5 TN. “Fed Funds and Repos” reached $1.0 TN in 2000 and ended 2007 at $2.1 TN. This Bubble in Wall Street Finance was one of history’s most spectacular Credit expansions. It also comprised the greatest use of speculative leverage ever. ‘

‘ … .
‘ The leveraged speculating community played an integral role in the overall Credit Bubble and more specifically to the Bubble in Wall Street Finance. They were instrumental in both spurring financial sector Credit creation/leveraging and directing the Flow of Finance to the asset markets. And the more the leverage and the greater the Flow to inflating markets, the higher the returns generated by the speculators. And the greater the returns, the more robust the “investment” flows into the hedge fund community - and the more leverage and the more fuel for additional self-reinforcing asset inflation. Well, this historic speculative Bubble is now in the process of blowing up. One of the greatest manias ever - surely The World’s Greatest Episode of “Ponzi Finance” - is absolutely coming apart. The wreckage is accumulating in all markets - everywhere.

‘Here at home, our maladjusted economic system will only be sustained by somewhere in the neighborhood of $2.0 TN of new Credit. It’s simply not going to happen. And while $700bn from Washington would seem like an enormous amount of support - in reality it’s nowhere close to the amount necessary for systemic stabilization. To the $2.0 TN or so of new Credit required this year (and next) add perhaps as much as several Trillion more necessary to accommodate speculative de-leveraging. The Bust in Wall Street Finance has ensured that insufficient liquidity will be forthcoming to maintain inflated asset prices and sustain the Bubble economy - creating catastrophe for the leveraged speculating community.

‘The “Freidmanites” thought they understood the policy mistakes that led to The Great Depression. They believed the “Roaring Twenties” was the “Golden Age of Capitalism.” The great bust could have been avoided with a simple ($5bn) banking system recapitalization. As we are witnessing today, the issue is not a manageable amount of new “capital” to replenish banking system losses, but instead the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess. ‘

safehaven.com/article-11456.htm