Economist and president of a research firm that bears his name, Andrew Smithers (not related to the Smithers of Mr. Burns fame) is saying our on-fire stock market is set to burn itself out. The S&P 500 Index is overvalued by 40%, he believes, and we can expect a plunge thanks to central bankers restraining themselves on the securities purchases that have pushed the markets up so far so fast. Also, banks are going to need to sell more shares to raise capital and pump up their balance sheets.

If the S&P 500 were to take a 40% dive today, it would fall to 647.76 (based on the Friday close), below the low it recorded in March.

For the fourth month in a row, Bank of England interest rates will remain at the record low of 0.5%. In an announcement today, the UK's central bank said it would not expand its quantitative easing of financial markets, much to the surprise of the market. The bank has been buying up assets aggressively, printing cash to finance what is likely to be £125 billion in purchases by the end of this month.

Financial markets expected a much different play, involving an increase in this asset purchase target by another £25 billion (to £150 billion). This move would have let the Bank of England shove even more money into the economy through next month, which is when the bank publishes its latest quarterly economic forecast.

This morning, the Bank of England's Monetary Police Committee (BOE) decided to keep its interest rate at the current all-time low of 0.5%, as was expected. The BOE announced that it would continue its 75-billion pound program, which is supposed to increase the money supply in hopes of keeping deflation at bay.

The BOE stated that, "since its previous meeting a total of just over 26 billion pounds of asset purchases had been made and that it would take a further two months to complete that program." Some experts believe the BOE will hold interest rates at 0.5% "well into 2010." Before the bank made its decision, the 10-year yield was hovering around 3.34%.

Seems Wall Street will not be able to extend Wednesday's gains as U.S. stock futures are quite a bit lower this morning, indicating resumption of the selloff is ahead. If on Wednesday investors hoped China would announce more spending, today they were disappointed when China's premier didn't announce more stimulus. In addition, auditors raised doubts about General Motors (NYSE: GM) viability.

Overseas, European markets dropped Thursday after the previous session's strong rally, as investors await key interest rate decisions later in the day by the European Central Bank and the Bank of England. So far, the BOE has cut the benchmark interest rate to 0.5%, the lowest since the bank was founded in 1694. The ECB is also expected to cut rates.

You read that right. Bloomberg.com has reported that The bank of England has lowered it's benchmark interest rate to it's lowest point since the bank was founded in 1694. How much more proof is needed to make obvious the fact that people and businesses just aren't borrowing money any more?

Even if some stalwart soul had the inclination to borrow some money, are there banks out there which are lending it? In the face of unemployment levels which some say honest calculations put up as high as 16%, banks are becoming adverse to lending money to anyone who might actually need it. Of course I can get you credit card applications all day long, if you're willing to pay upwards of 19% interest on new money.

So you have to wonder, when is it all going to break loose. Honestly folks, if the promise of increased revenue reserves was in any way going to help us, don't you think the contraction would have slowed by now? The only way additional cash will correct anything is if that cash is put directly into the hands of the people who pay the bills. Of course, we all know that will never happen. Our government will continue to drop wads of our yet unpaid tax dollars into the laps of their corporate sponsors. That, for now, is where the buck now stops.

Managing Director Bill Gross, who manages the world's biggest bond fund for Pacific Investment Management Company, wrote in a report published on the firm's web site, that he expects the U.S. Federal Reserve to lower key interest rates to 3.50% to avoid a U.S. recession.

Wall Street may interpret lower interest rates as good news for stocks, long-term, but that will not be the case with the U.S. dollar. Along with the current account, and investment performance in a particular country, a major factor in a currency's strength is the interest paid on deposits. Generally, currencies with high interest rates are valued higher than currencies with low interest rates, all other factors being equal.

In a stunning move this morning, Reuters reports that the Bank of England is bailing out England's Northern Rock plc (LSE: NRK), which had the biggest share of the UK new mortgage market in the first half of 2007.

The strange thing about this bailout -- in the form of an unspecified emergency loan from England's version of the U.S. Federal Reserve -- is that Northern Rock forecasts a profit for 2007. Specifically, it now expects 2007 pretax profit $1.1 billion, albeit 23% below analysts' current consensus forecast.

Given this expected profit, why would Northern Rock need a bailout? The mortgage company depends on wholesale financing as the source of cash to lend out to borrowers. And given the weak state of the market for buying packages of mortgages it and its peers originate, it appears that Northern Rock faced a short-term liquidity crisis. The funds it's receiving are at a higher, penalty, interest rate.

NRK shares, already down 50% in 2007, plunged a further 20% in early trade. If there's anyone who knows how wide and deep the problems lie in the shaky global financial network built on mortgage-backed securities, they're not saying.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.