Yesterday, as of Feb. 6, CNN had a simple explanation for the stock market mixed outcome: many investors, still uneasy about the economy, cashed in earlier gains after a Federal Reserve official suggested that rising inflation could prevent the central bank from making further interest rate cuts.

What does it mean? It means that stock market players have not forgotten the era of cheap money and its ensuing boom. If the fed’s rates were going back to 1%, we’re willing to bet that we’d have DOW 20,000 by now… Sweet nostalgia! They still think that it only takes to print more money to make the recession go away while forgetting what got them into this mess in the first place - with the help of the three major credit rating firms, the real culprits.

As to wonder when the those credit rating agencies will be downgraded. Alex Wallenwein has investigated:

Somewhere in the distant past, in the early 1970s, they were paid by the investors who needed to tap them for their information so investors could make educated judgments on investment risks. That is no longer so. Now, they serve two masters at the same time - but only one master really gets the benefit: the one who pays them.

So there we have it: that are monstrous conflicts of interest that made confidence in credit run amok.

The problem is not a liquidity crisis per se but too much money flooding the market and whose value is getting more and more worthless because too much money is purchasing goods and services. But once a currency is close to junk, we easily can imagine the amount of banknotes that are needed to achieve the same results. So indeed, more money is needed to help the system stay afloat.

2007 may come to associated with the start of the “big” credit crunch. 2008 has begun with a number of “unresolved” items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: “Things are going to get a lot worse before they are going to get worse.” … Satyajit Das - 03.02.2008

Bank woes are ‘poetic justice’ Buffett said:

“I wouldn’t quite call it a credit crunch. Funds are available,” Buffett said during a question and answer session at a business event. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.” … He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

While ‘dumb money’ is about to engulf the planet slowly but surely, US Homeowners Confound Predictions.

But the downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike…. In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. Or, to put it another way, financiers have been tripped up because they ignored one of the most basic rules of investment, which is usually found in product literature: the past is not always a guide to the future… “There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr McDaniel admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected…

To be continued