A Sacramento mortgage lender's vision

You may be aware that the Dow Jones posted the largest single day advance since 1933 yesterday, 936 points. (NY Times article here) This was followed by massive gains in both the Nikkei and the Europe markets.  Predictably, the bond market (which was closed for the monday holiday) got creamed today as traders bet that the recent involvement of central banks will improve the economy, and that the financing of this manoeuver will increase the supply of government debt.

There has been a lot of coverage of credit default swaps in the news; these are very complicated financial instruments that would take an entire post in and of itself to explain. But I've ran across an incredibly well written article that explains the risks and benefits to credit defaults and US treasury bonds, and in the process explains what is happening the yield of latter.

Which brings me to another article from PIMCO, this one from CEO [and legendary bond trader] Bill Gross, titled: Nothing to Fear but McFear Itself. It would be an injustice to this article to try and synthesize it so here are some quotes- "...believes that capitalism is the best and most effective economic system ever devised, but it has a flaw: it is inherently unstable"

"We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past."

It is important to note that everything forecasted has come to pass.  G7 has met and all the central banks of major world powers are now letting unrestricted lending happen on all fronts, and rates have been cut to near 1%. There is historical preceedence to this agreement; it happened in the 80's and the two items of interest are the Plaza Accord and the Lourve Accord, which had the world cooperating to manipulate the value of the dollar.  Until the credit crisis is repaired, and liquidity is restored, we will not see the light at the end of the tunnel.