For December 14, here's Bill Bonner:

*** Not much action in the markets yesterday – except that the price of gold fell sharply. Still above $800.

*** And commentators are still wondering what this stock market is doing. Up, down…up, down - where is it going? We don’t know. But it still looks to us as though there is much greater risk on the downside than there is the hope of reward skyward. Recession looks inevitable. Earnings are falling. Where’s the upside?

Even Alan Greenspan now says the US economy is “getting close to stall speed.” How would he know? He must have read it in the paper.

Most likely, stocks have begun to turn down. The tide has turned. That great wash of liquidity that buoyed up all asset prices – from apartments in London to soybeans to trash art – is ebbing. We saw it first at the very margins – the low, tidal sub-prime flats that began to dry out in the summer. Now, we’re beginning to see it in deeper sectors of the economy.

But wait, we know what you are thinking, dear reader. What about all this new liquidity the central banks are putting into the system? Won’t it turn things around? Won’t it reverse the tides? Won’t it prevent a recession?”

Yes, the central bankers are working overtime. They’ve launched a concerted, coordinated effort to make sure the banks have money As the Financial Times put it, Ben Bernanke has gotten out his helicopter (referring to a remark he made before he became Fed chief, in which he said he’d drop money from helicopters if that was what it took to prevent a Japan-style slump).

As we said yesterday, central bankers may be able to kill a boom. But they can’t necessarily revive one that is determined to die. Occasionally, they run into the problem economists describe as ‘pushing on a string.’ They make money available to banks. But the banks aren’t able to get the cash to the people who really need it. Remember those poor people who can’t buy heating fuel? Well, between a rich Wall Street banker and a poor person in Detroit are a whole legion of intermediaries – not a one of whom wants to lose money. Who wants to lend money to someone who may not pay it back? They’ve tried that; it didn’t work. Who wants to lend to a lender who lends money to people who can’t back it back? Ditto. And who wants to invest in debt based on a loan to a lender who lends to lenders who lend to thousands of people who can’t pay it back? Been there; done that too. That’s when the string starts to bend. The feds push more money ‘into the system,’ but the system doesn’t want it.

Is that what is happening? Is that what will happen? We can’t tell you that. But we can tell you that it does happen from time to time. It did happen in Japan recently. And it’s bound to happen here, sooner or later. That, of course, is when Ben Bernanke really does start looking around for a helicopter.

For December 5, here's James Mackintosh:

1,000% return for hedge fund betting against subprime loans
By James Mackintosh

“A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world's best-performing funds of all time.

“Mr Lahde, whose fund is one of the smallest specialists shorting subprime, has now begun to return money to investors, telling them in a letter: ‘The risk/return characteristics are far less attractive than in the past.’

“In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession - which he also predicts.

“‘Our entire banking system is a complete disaster,’ he wrote. ‘In my opinion, nearly every major bank would be insolvent if they marked their assets to market.’ He also said he would be putting  some of his own profits into gold and other precious metals.

December 3, here's the Daily Reckoning's Bill Bonner:

*** As anticipated, here comes the Bush Administration with a plan to make the subprime situation worse.

It’s called the ‘teaser freezer’ program and it could be announced as early as today. What’s the idea? Well, it’s quite simple – just pass a law! Actually, we’re exaggerating. The discussion so far, as we understand it, is to ask for voluntary cooperation from the mortgage lenders. They are supposed to let the teaser rates ride…for people who can’t afford an increase.

“Deal in the Works to Freeze Rates on Subprime Loans,” says the Washington Post. Of course, if such a deal made sense, lenders and borrowers could work it out on their own. And if it were possible to eliminate the problem – or even ease it – by government decree, it would be a very different world than the one we live in. When people owe money and can’t pay it back, someone is going to take a loss. You can diddle with the details all you want...all you’re going to do is to shift the loss from someone who deserves it onto someone else. The great innovation of the recent credit boom was to create a stick that was long in the middle and short on both ends. On one end, the borrowers are now losing their houses. On the other, the investors are losing their money. The financial intermediaries – notably Goldman Sachs – are sitting pretty. They made their money by putting the two dumbbells together. And now, the Bush Administration is taking the time honoured tradition of pushing more of the losses away from the borrowers...and towards the other end of the stick that is, towards the lenders. Why? Hey... where have you been, dear reader? We live in a democracy. One man, one vote. How many subprime borrowers are there? How many subprime investors are there? You do the math. And expect more meddling as the crisis continues.

*** Among the many investors in subprime debt were state and local governments. Now, the press reports that Florida schools are “flat broke” as a consequence. And they’re not the only ones. We’re read about a couple French banks that have taken huge hits. And in last week’s news was a report from north of the Arctic Circle, where towns in Norway had – you guessed it – invested in subprime debt. Citibank sold them the toxic stuff. Now, the poor Norwegians are not going to be able to retire in the style to which they had hoped to become accustomed.

So you see how it works? What goes around comes around. A fellow buys a home he can’t afford. Wall Street sells the debt to a pension fund. The guy defaults on his mortgage. He loses his house...and his pension! The Wall Street financier, in the meantime, puts a new wing on his palace in Greenwich.

*** But don’t worry. Another rate cut is coming – in less than two weeks. Let’s see how this works again...people get into trouble because they’ve borrowed too much money. Then, the feds come to the rescue – by offering to lend them more at lower rates!

But what’s this? The banks aren’t cooperating. While the feds lower…the banks raise. They ask for higher rates to protect themselves from the growing losses.

Part of the problem is that there is so much credit around...of such dubious quality…that the banks (and investors generally) don’t know what to make of it. Double-A mortgage-backed credits are now trading at half their prices three months ago. It may be true that investors are overreacting. But after such a long period of not reacting at all…what would you expect?

And isn’t is possible that the Fed, like the Bank of Japan before it, is now in the unenviable position of no longer pulling on the string of credit…but pushing on it? Isn’t it possible, that the market no longer welcomes cheaper credit, but fears it? And isn’t it possible, as we guessed last week, that the Fed is no longer driving the price of credit - by lowering rates - but following along behind what the market is already doing? US treasuries are dear; yields are low. The 10-year note is already below the yield of the Fed Funds rate. People are happy to lend to the government, because they know they will get their money back. But woe betide the borrower without the US government behind him.

Will a lower Fed rate encourage the mortgage lender to finance another house in the Detroit area? Will it encourage a builder to put up more condos in Miami or Las Vegas? Will it entice the marginal homebuyer to enter into another ARM contract?

Maybe not. That’s the trouble with the immoveable object of deflation. It can be stubborn. Sometimes, it won’t budge.