(Originally written over a year ago - Nov of 2007)
As liquidity dries up, the truth is revealed!

A financial crash is not sudden, singular event.

The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday – Not so!

A financial crash is a process lasting as long as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the x-ray vision of reality.

Multiple fallacious beliefs now show under the light of evidence for all to see. The complicity of the ratings agencies in creating the housing bubble, while notable, is a minor revelation.

There are several false beliefs in our current financial system. Let's review a few!
False Belief: Risk spreading instruments disperse financial risk, creating greater financial market stability and resilience.
Fact: Underwriters, mostly investment banks, sold exotic credit derivatives and externalized the risk, dumping it mostly on foreign pension funds. Risk spreading instruments create Risk Pollution, causing financial risk to disappear from sight for a time, where it concentrates in the weakest parts of the financial system only to reappear later like PCBs at Love Canal. The subprime mortgage market is the beginning of the discovery of hundreds of Credit Love Canals. A multi-trillion dollar Risk Pollution Superfund will have to be developed, at taxpayer expense, to clean up over ten years of Risk Pollution.

False Belief: The Housing Bubble Correction will not seriously damage the economy.
Fact: Every aspect of the economy on which rising home prices depended, from the market for mortgages to furniture to autos, is in decline. The collapse of the housing bubble will in my opinion cause a recession in the U.S. by Q4 2007.

False Belief: Deficits don't matter. An economy can be continuously stripped of its industrial capacity and its assets inflated and traded for profit continuously, and imports can be paid for with borrowed money forever.
Fact: No economy in history has ever survived long running large trade and fiscal deficits. The entire economy needs to be overhauled, from the tax system to the monetary system, to re-build capacity for capital formation, saving, and capital investment in productive industries. USA, Inc. needs to be restructured.

There is very little that the Fed can do to stop the dissolution of fallacies process now that it is underway. Rate cuts will further weaken dollar and create even higher inflation, which is one of the causes of the crash. The Fed will keep the discount window open to prevent cascading debt defaults and bank failures.

Here's how it went down last time – almost 80 years ago. Notice todays parallels back in these 1929 headlines. Remember this process occurred over year's time. Even in March 1929 the word PANIC was widely mentioned!

Wave of Buying Sweeps Over Market as Stocks Swing Upward
Radio Flashes High; General Motors and Steels Soar
By Laurence Stern
The atmosphere of doubt and caution which Wall Street in recent weeks has come to regard almost as habitual on Thursdays was swept away yesterday in a rush of buying...
Perhaps the market's own strength weighed as heavily with speculative minds as the logic of the situation, since the tape is the one institution Wall Street does not argue with. At any rate, the market appeared entirely confident from the opening gong. It was a firm, almost buoyant, opening, many initial transactions involving large blocks at sizable price advances...

The advance was one of the most vigorous of the year, amounting to a net gain of 6.97 points in the Dow Jones average of thirty representative industrial issues...

- The World, March 15, 1929
Another article entitled:
Stocks Soar As Bank Aid Ends Fear of Money Panic
By W. A. Lyon
The stock market strode out from under the shadow of a panic in call money that so lately threatened, revived in all its old strength yesterday. Assured that the New York banks were ready with their boundless resources to prevent a money crisis, the public and the professional trader set out to repair the damage done to prices on Monday and the major part of Tuesday.
Stocks in the aggregate, though bucking a 15 per cent rate for loans, enjoyed the greatest advance they have known in a single day in the last two years. Not even the surging bull markets of the memorable year 1928 saw such a day of heavy buying.

This was in the New York Herald Tribune, March 28, 1929
Banker Says Boom Will Run Into 1930
That at least a part of the great amount of money in the securities market may represent temporary employment of funds eventually finding their way into business uses, and that the prosperity of the present business cycle will probably not end in 1929, is the belief expressed by the J. Henry Schroder Banking Corporation in the quarterly review of the London house of Schroder.

- The World, March 30, 1929
Public Liquidation Spurred by Bears, Hits Low Market Scare Orders From All Over Country Halt Ticker an Hour in Feverish Day
By Laurence Stern
With speculative nerves rubbed raw under the persistent hammering of bearish traders, a renewed wave of public liquidation swept over the stock market yesterday, depressing prices severely and hopelessly clogging the quotation ticker...
...To the majority of the market's followers, who now must be counted in millions, the most significant aspect of the decline is that it has carried the average level of the list to a lower point than was reached on Oct. 4 in the sharp break that climaxed a month of gradual recession.

This raises a pertinent question, whether the bull movement of the last five years has definitely given way to a liquidating market...

-The World, October 20, 1929
Brokers Believe Worst Is Over and Recommend Buying of Real Bargains
Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-New York Herald Tribune, October 27, 1929
Gigantic Bank Pool Pledged To Avert Disaster as Second Big Crash Stuns Wall Street
Largest Financial Powers in the City Meet After Day of Hysterical Liquidation Sinking Prices Below Thursday's
By Laurence Stern
After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster.
Arrangements described as "fully adequate" were completed at a conference at the offices of J. P. Morgan and Co. at Broad and Wall Streets...
Although no formal statement was issued, it was the consensus of those at the meeting that the worst of the liquidation is over and that a natural demand for investment stocks now available on the bargain counter should go far toward an immediate restoration of trading stability.

-The World, October 29, 1929
Stocks Up in Strong Rally; Rockefellers Big Buyers; Exchanges Close 2-1/2 Days
By Ferdinand Lundberg
Revived by spontaneous investment buying and declarations of large extra cash dividends by leading companies, and free of the delirium that has recently gripped share owners, the stock market yesterday received a fresh start and scored a record comeback. Volume on the Stock Exchange totaled 10,727,320 shares, the third largest day on record.
The high spot of the day from a stock market viewpoint was the statement by John D. Rockefeller that there was no need to destroy values and that he and his son, John D. Rockefeller Jr., had been heavy buyers of stocks for investment in the last few days, and would continue to buy at present prices...

-- New York Herald Tribune, October 31, 1929
Very Prosperous Year Is Forecast
Guenther Analyses the Report of Mellon Covering 1929
That 1930 may be a very prosperous year, industrially and otherwise, without the peak conditions that made 1929 and exceptional year for business prosperity, is an observation made by Louis Guenther, publisher of the Financial World, in a statement based upon Secretary Mellon's fiscal report...

"To grow too fast is often unhealthy because of the suddenness with which a readjustment must be met. By far and large the country would be better off were further progress made along more normal lines...
Fortunately, we have returned to a more normal mind in appraising prospects. We are not looking for the Midas touch on everything to which we turn. That makes us more satisfied with normal incomes and normal profit returns."
-The World, December 15, 1929

Get this link:
http://www.youtube.com/watch?v=KfqrrhwWirY

Where does this lead us?

Was this not in fact the precursor to our toying with Fascism in the 1930's ?

Did the stock market crash and ensuing great depression not lead to an attempted coup by wall street interests such as JP Morgan and Irenee Dupont to overthrow the Roosevelt administration?

If it were not for one true patriot – Smedley Butler we may all speaking Italian or German and Mein Kompft would be required reading in high school!

Saving our democracy from fascism is not someone else's job – it's our job. Yes you and I. Contact your local, state, and federal representatives and tell them you will not stand for the continual eroding of our rights! Demand that the house of representatives begin the impeachment process of traitorous Bush and Cheney. Exercise what remains of your freedom, your rights, and our constitution to boot these jack booted thugs out of office. We must not allow the erosion of our constitutional rights become devastatingly powerful tools that Bush and Cheney have amassed to themselves, to be passed onto future presidents. Future presidents must not be tempted with so much power that they are absolutely corrupted!

As a financial crash is not an event but a process, neither will the restitution of our democracy be an event but a process! Do not despair, although this process will be long and difficult, it none the less must be accomplished otherwise our grandchildren will curse us for our inaction!

As Thom Hartmann says – Activism begins with you – Tag your it!
Well – Tag Your IT!