It must be time to pay the piper. It seems all of our efforts to avoid the consequences of a recession in the aftermath of the technology bust in 2002/03 has just created an even more disastrous recession in 2008/09.

When you reach a point where the fear, and pain, and worry, are so great that valuations have no meaning as a consideration in business transactions and investments you have a dire situation. When you can no longer assess what something is worth you really are in trouble. Regardless of what my brain thinks, my heart feels we are there.

The Dow Jones Industrial Average tumbled again today relentlessly seeking a bottom that was not there. If not for the market closing the it might have kept falling. It ended the day at 9447.11, down 508.39 losing another 5%.

In retrospect the economic soft landing that Alan Greenspan manufactured with very low rates, that were kept low for far too long resulted in interest rate euphoria. That allowed the desire to buy a home to ramp up into wild speculation, ever increasing valuations, and development, and onto home equity loans at 100% of bloated values. Valuations that were unsupportable. When that started to run dry people started to tap into their credit cards with reckless abandon supporting their unrealistic lifestyles, and on the other end of the spectrum just to 'make ends meet'. Well, the 'ends are not meeting any more'.

Earlier today I posted No Cramer, now is not the time to panic! and I have not changed my mind but in watching my fellow investors increasingly scavenge for little bits of liquidity during this discouraging tail spin it seems only time and a lower standard of living will settle things. I think folks understand the time element and are willing to tighten their belts. I am not sure most people have come to grips with the fact that we may entering a new economy -- and it is not the one that was advertised.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money..

The U.S. Federal Reserve and the major central banks around the world took action again Tuesday to keep the financial markets liquid, amid a credit crunch that threatens to slow global growth to a crawl.

The Fed added $50 billion in liquidity to the financial markets through overnight repurchase agreements. In addition, the European Central Bank, the Bank of England, and the Bank of Japan each announced previously unscheduled actions to add liquidity to the financial markets, Marketwatch.com reported Tuesday.

The Fed's action came after overnight rates soared 333 basis points to 6.44%, as private banks pulled back credit and became reluctant lend to one another.

Economist Peter Dawson told BloggingStocks Tuesday the aim of the world's major central banks is clear: maintain market liquidity to enable transactions between solvent parties.

"The Fed and other central banks may have drawn a line in the sand regarding not saving insolvent institutions, but their stance regarding functioning banks is clear: they're going to prevent solvent institutions from freezing up for lack of liquidity," Dawson said. "The private banks may not choose to use that liquidity, due to a reluctance to conduct business, but the funds will be there."

In a move that will bloody a number of its customers, UBS (NYSE: UBS) will mark down the value of auction-rate securities held by its customers. According to The Wall Street Journal, the bank "began on Friday to lower the values of so-called auction-rate securities held by its clients, a move that will be a jolt to customers who had been told they were investing in a 'cash alternative.'"

The action could drop the value of some of the paper by as much as 20%. Other banks are likely to follow UBS's example.

Auction-rate securities are held by individual investors, institutions and some corporations, who list them on their balance sheets as cash equivalents. At the end of the first quarter, the public companies in this pool may have to take large write-offs for their holdings, which will hit P&Ls.

There is a strong case to be made that the banks and brokerages that marketed auction-rate paper did so by saying that they were nearly as safe as cash. The auction-rate market traded well from 1985 until late last year. At that point troubled financial companies were not willing to keep the market liquid by buying excess securities from one auction and selling them in the next. This role as "specialists" kept the market operating smoothly.

There will almost certainly be a rash of lawsuits now from institutions and corporations. They will argue that the financial companies who "made the market" in auction-rate paper had an obligation to keep it trading if the securities were offered to investors as being as liquid as Treasuries.

If the auction-rate market continues to deteriorate, the lawsuits can go on as investors lose more with each passing quarter.

Douglas A. McIntyre is an editor at 247wallst.com.

Regional central bank cooperation regarding actions and facilities aimed at maintaining financial system liquidity, yes. Regional central bank cooperation regarding interest rates, stay tuned.

The European Central Bank maintained its restrictive monetary policy stance regarding interest rates Wednesday when President Jean-Claude Trichet underscored that the bank is no hurry to lower key, short-term interest rates, Reuters reported.

The euro moved higher versus the dollar Wednesday at mid-day on the news, rising about one cent to $1.5744.

Trichet said price stability remained the ECB's number one concern and that the bank's current interest rate stance would help keep euro-zone inflation under control, Reuters reported. The ECB has kept its key refinance rate at 4.0% for nine months, while its transatlantic counterpart, the U.S. Federal Reserve, has lowered benchmark, short-term interest rates by 300 basis points since September 2007, in an effort to jump-start a U.S. economy stalled by the nation's worst housing slump in more than 20 years.

Further, Trichet turned aside notions that the ECB would soften its definition of price stability, the ceiling for which the bank places at "below but close to the 2% level." The euro-zone posted a 3.3% inflation rate in 2007, a rate Trichet has repeatedly said is too high.

As Portfolio.com so eloquently stated, President Bush has "Lyndon Johnson's war and now Herbert Hoover's bank runs. Other than that, it's going well."

With the high-profile collapse of The Bear Stearns Companies Inc. (NYSE: BSC) and questions surrounding the liquidity of other banks, some, like Jim Cramer, are urging people to relax and not rush to withdraw money from bank and brokerage accounts. This is reasonable: deposits that aren't unusually large are fully insured and there's really no reason to worry.

In today's Wall Street Journal, James B. Stewart writes (subscription required) that "before anyone panics and starts another run on a big bank, let me say unequivocally that client assets in the big brokerage firms are safe from the danger of any Bear Stearns-type collapse."

Stewart's right. But here's the thing: if your account with E Trade Financial Corporation (NASDAQ: ETFC) or another scandal-plagued financial services firm is giving you sleepless nights, switch! There's just no reason not to -- the different banks are all reasonably competitive and moving money around is pretty easy.

I know: if everyone does that, it will cause a run on the bank. But not everyone will, and if moving money will ease your nerves, go for it.

The dollar fell to a yet another record-low against the euro Friday and plunged against the world's other major currencies, as investors shunned U.S. investments ahead of an almost-certain U.S. recession, with likely further interest rate reductions from the U.S. Federal Reserve.

Friday's trigger event for selling was The Bear Stearns Companies, Inc. (NYSE: BSC) stunning announcement that -- less than 10 days after senior management officials called liquidity-crunch rumors 'absolutely ridiculous' -- it had accepted a 28-day, emergency, secured loan from the U.S. Federal Reserve via JP Morgan Chase & Co. (NYSE: JPM).

The Fed said in a statement that it will ``continue to provide liquidity as necessary to promote the orderly functioning of the financial system,'' repeating reassurances Federal Reserve Chairman Ben Bernanke has made often since credit problems first surfaced in August 2007. The Fed did not state how large their loan is to Bear Stearns.

As I waited for Bear Stearns Cos. (NYSE: BSC) conference call today, I could only shake my head in familiarity. I'm not the only one to see Lehman Brothers in 1998 all over again. Was it only a matter of time before the liquidity crisis hit? Bear Stearns has always been in the eye of the storm.

In the mind's eye of every young investment banker is an image of the people who work for various firms. Goldman Sachs' and Merrill Lynch's associates are stunningly beautiful and slim, the women are blondes with shiny hair and everyone wears French blue Egyptian cotton shirts. At Merrill Lynch and J.P. Morgan, it's all pinstripes and quiet good looks, confidence and understatement. At Lehman and Bear Stearns? Brash is the name of the game, and the young associates look like they're freshly showered after their championship wrestling match. You imagine that half of them are Army reservists, or maybe Navy Seals. Conservative? Only in the cost of their suits.

No, Bear Stearns brings "aggressive" to new heights, and certainly over the last few weeks its stakeholders are running scared. According to CEO Alan Schwartz in today's statements, the liquidity crunch was a phantom, "untrue rumors" that the company was undergoing a run on its assets scared lenders, and suddenly, no one would loan the investment bank overnight funds -- as Jim Cramer says succinctly, it's the "who is still stupid enough to have big trades" that put an institution at risk, fear. As Tom Taulli wrote, all the risk factors were suddenly triggered and Schwartz said those ugly words, "the liquidity position deteriorated," the words no one wanted to hear. Peter Cohan can't believe how quickly we've gone from liquidity concerns to a government bailout, and asks, "Why is the Fed getting involved instead of private investors? How bad is the problem really?"

Bad enough to send an already fragile market tumbling back down (the Dow is down 252 points as of 3:20 p.m.); bad enough to drag down peers like Citigroup, too. Brash, aggressive, bad suit bad. We can only hope the pinstripes over at J.P. Morgan Chase will make it all better again.

It was clear yesterday from the stock price action that The Bear Stearns Companies (NYSE: BSC) was facing some pain. The stock plunged yesterday to a five-year low on liquidity concerns, according to Bloomberg News. Bear rolled out its executives in an attempt to alleviate those concerns.

But today's news of a bailout to ease a liquidity squeeze is a major shock. The Wall Street Journal reports that JPMorgan Chase & Co (NYSE: JPM) and the Federal Reserve Bank of New York are arranging financing for Bear Stearns. Bear's stock is down more than 15% in early trading on the news. And the Dow is down 234 points.

The Journal reports that Bear Stearns CEO Alan Schwartz, in noting the liquidity rumors, said in a separate statement that "amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

This move raises many questions: How much money is being raised? Why is the Fed getting involved instead of private investors? How bad is the problem really? How much of Schwartz's comments are covering up for a really bad situation? Is this a government bailout for Bear Stearns's bad decisions?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Mervyn King, governor of the Bank of England, and long-time inflation hawk, may stand out in history textbooks [subscription required] for all the wrong reasons, in the view of some monetarists, The Wall Street Journal reported Monday.

In August 2007, when markets nearly froze as Wall Street digested the first wave of subprime mortgage and related asset defaults, King initially was not moved. As the U.S. Federal Reserve and European Central Bank added billions in liquidity to the financial system, King refused to participate, arguing that the tactic would increase the intensity of future crises.

But events soon took on a momentum of their own, and King changed his stance. In September 2007, when Northern Rock experienced a bank run, King sensed a threat to the financial system and added liquidity, calming London's credit and equity markets. Still, Britain's press labeled him "Swervin' Mervyn."

Unwarranted criticism?

London-based economist Mark Chandler told BloggingStocks Monday the King criticism "is unfair, and unwarranted."

The U.S. Federal Reserve announced that $16.5 billion of its first $20 billion in loans under its term auction facility went to institutions in the New York district [subscription required], an area that includes the headquarters of some of the nation's largest banks, The Wall Street Journal reported on Friday. The Fed doesn't disclose loan sizes or borrowers' identities.

Meanwhile, the Fed's Dallas district reported loans of $1.4 billion, while the St. Louis district reported loans of $1 billion.

Earlier this fall, the Fed established the term auction facility as an alternative short-term loan operation because banks were reluctant to access the Fed's traditional short-term window, the discount window. Banks became reluctant to borrow from the discount window because of the stigma attached: doing so can telegraph distress to other banks.

Fed Analysis: So far, the Fed's effort, along with the effort of the European Central Bank and other major central banks, to provide short-term loans to banks appears to be working. Both overnight and two-week liquidity has improved, as measured by yield spreads and transaction conditions. A later announcement by the Fed to maintain the term auction facility "for as long as necessary" further calmed the markets. Still, investors/readers should keep in mind that the housing correction / credit quality issue is young: given the plethora of at-risk subprime loans and related assets, more default declarations are undoubtedly ahead in 2008.

Once again, the ever-incisive Financial Times columnist Martin Wolf, an economist, identifies with laser-accuracy what ills the current market. The problem, Wolf argues, is not a lack of solvency but a lack of liquidity (i.e. 'panic').

Wolf does not deny that there have been bad loans (there have been) or that no companies will go out of business (some will). But the circumstance that froze credit markets, that caused quality corporate bonds to fail to price, and that leads to 100-point spreads between the LIBOR rate (what banks charge each other) and the ECB's benchmark interest rate, is rooted more in a lack of confidence, than a lack of sound economic fundamentals or a lack of resources.

A lack of liquidity

And a lack of liquidity or 'panic' is something that central bankers can address. With the above in mind, the U.S. Federal Reserve's plan, in consultation with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada, to inject $40 billion via auctions into the financial system is appropriate and prudent. (Further, in addition to reciprocal currency arrangements, the companion central banks will take related actions, including the Bank of England's decision to accept a wider range of collateral on 3-month loans).

Historically, October is a rough month for the stock market.

So when the markets made it through October 2007 following August 2007's brutal subprime asset-induced credit crisis and accompanying stock market sell-off, everyone breathed a sigh of relief.

But is August making a return appearance in November?

One day after cutting key short-term interest rates, the U.S. Federal Reserve, in a surprise move, added $41 billion in liquidity to the markets, The Wall Street Journal (subscription required) reported Thursday.

The Fed used three separate operations to inject the $41 billion, in the largest injection of funds since the August 2007 credit/liquidity crisis, The Journal reported.

Fed Analysis: At first glance, the Fed's $41 billion infusion may seem contradictory, given Wednesday's mild quarter-point interest rate cut and accompanying statement that appeared to lay the ground for a monetary easing "pause" at its next meeting in December.

Still, a more careful read reveals that these slightly divergent actions are complementary and nothing new for the Fed. With Wednesday's statement the Fed signaled that U.S. GDP growth is adequate (but not robust), and that the markets are functioning well, while also noting the Fed remains on guard for price pressures. Thursday's $41 billion infusion signals that the Fed, nevertheless, also remains ready to ensure the proper function of the markets, should additional credit market disturbances surface in the weeks and months ahead. In sum, it's a classic, nuanced, two-step by the Fed: it's ready to implement a rate cut pause if the economy gains momentum, but simultaneously ready to add liquidity, should conditions warrant.

There's much speculation today about the possibility of yet another interest rate reduction by the Federal Reserve. Some people indicate they think another rate cut would be a good thing. Pardon me while I ask: Are they nuts?

The dollar is already devalued to the point that our trading partners are getting edgy about their export values, and you can forget about foreign investors sticking their money into American companies to help spur development. Low level municipal bond issues could soon become a thing of the past, and that concept of placing money into conventional savings accounts? Yeah okay, I'll get right on that.

Jim Cramer sings a gloom and doom song about 7 million home owners becoming renters, and declares that the nation will be required to swallow $500 billion in losses. He alludes to a wholesale crumbling of major banks. I see no mention in his blog about possible alternate solutions to the trouble that sloppy bankers have caused themselves. Personally, I don't think that ruining the dollar with yet another round of artificially created economic stimulation based on cheap credit is a good long-term solution for our country, although it might allow some of those sloppy bankers another breather before they have to face the music. The thinking that cheap bank credit will help the economy by infusing borrowed money into the stock market and loosening up spending habits is nothing short of a sucker's bet.

Alan Greenspan, the former Fed chief who some hail as the greatest central banker of all time, tells 60 Minutes that he didn't realize the sloppy mortgage lending practices of recent years could hurt the larger economy until recently, according to the Washington Post today. The 60 Minutes interview with Greenspan is scheduled to run on Sunday evening at 7 (EDT).

Greenspan is back in the public eye as he promotes his new memoir, "Age of Turbulence," which is being released Monday. It's a delicious irony that the man who turned on the liquidity spigot in the first place would come out with a book so titled.

But apart from that chuckle, this revelation is unsettling. I'm not sure how arguably one of the most influential Fed
leaders in history could be so short-sighted about the long-term ramifications of his actions (specifically, lowering the interest rate to the lowest point in a generation). I'd like to think these guys are a lot smarter than the rest of us,
with access to the best financial brains available. How is it possible to not realize that unbridled lending will end in
tears?

Hasn't he ever heard the old tropes about paying the piper or the free lunch? Stay tuned for this and other explanations, coming soon to a bookstore near you.