Greg Ip of the WSJ is generally considered a conduit for the Fed, saying what they can not or will not say directly. He wrote on Monday that the Fed might or might not cut rates: “Both courses of action have risks. Perhaps the biggest is that the market’s certainty that rates will be cut creates a burden on the Fed to deliver. Ordinarily, meeting market expectations isn’t a goal in itself for the Fed. But the current environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging.”

William McChesney Martin, Fed chairman in the 1950s and 1960s, said: “It is the Fed’s job to take away the punchbowl when the party gets really going.” Paul Volcker, the last Fed chairman deserving of any respect, wouldn’t have thought that pandering to the markets made any sense. “The market” doesn’t have any certainty about anything. It is just Wall Street that has the certainty, and this article shows that you, Mr Bernanke, are unduly influenced by Wall Street. The market is fragile? Flirting with all time highs and fragile? Don’t take us peasants for idiots as well, just because we don’t have our own taxpayer-paid tennis courts. Mr Bernanke, you showed your true colors when you announced a discount rate cut just before the market opened on an option expiration day. That was nothing to do with monetary policy, it was an attempt to manipulate the stock market. Alan Greenspan had previously done it for the same reason, it worked for him and it worked for you. But that doesn’t make it a responsible policy act, it makes it favoritism for a particular group of traders and it further erodes your and the Fed’s credibility and reputation for integrity.

Mr Bernanke, you are encouraging yet another bubble in the stock market, in effect pouring raw grain alcohol into the punchbowl. On your head be it. It is better for the market to be disappointed than dead drunk. And you, sir, are no better than your irresponsible predecessor. Perhaps worse, because you are showing weakness as well.

This morning’s 3Q advance real GDP number showed a growth of 3.9%, as against a consensus estimate of 3.4%. This robust performance is entirely attributable to an astoundingly low increase in the GDP deflator , 0.8%, as against expectations of 2% and an average for the last 4 years of 3%. The consensus for nominal GDP was 5.1% and the actual nominal number was 4.7%, below consensus.

Presumably this reflects weakness in the housing markets and “owner’s equivalent rent”, a made-up number which dominates this price index. So I would regard this as a very dubious number. If the GDP deflator had been at its recent average, GDP would have been plus 1% or so, and 2% or so if it were at consensus. Mean reversion is to be expected next quarter, which may well mean a negative number. Or maybe this outlier will be revised away.

The chart below, from LoanPerformance via Deutsche Bank, shows how aggressive adjustable rate mortgage lending has been. This chart is specific to a sample of subprime ARM loans, but I would not expect that prime loans would show anything very different. The yellow bars show the debt-to-income(DTI) ratio based on the loan’s initial rate. The blue bars show the DTI recalculated using the fully amortized rate, that is the actual cost of the loan which the borrower has to pay at some point. One can clearly see that the majority of these loans are unsustainable, the borrowers having committed more than 40% of their income to their house purchase. There is no way out of these loans except losses for someone. This was excessively aggressive lending even based on the teaser rate.

An investment pays you. A speculation needs someone else to pay you.

So for example, if I pay $695 for a share of Google, as would seem to be the going price this morning, then in order to receive a return I need someone to buy it from me a a higher price. This person would be the GF, or “Greater Fool”. Buyers at these prices are relying on a supply of GFs. Moi, I’m not so sure.

Right now, it seems to me that investments are good. So I buy Treasuries, U.S. and Canadian. They pay me, twice a year. I don’t have to hope for anything, it is what it is with a high degree of certainty.

However, a bet that there is only a limited supply of GFs seems to me to be worthwhile. That, of course, is a speculation.

You wouldn’t know it from the frantic jamming in the stock market, but there is a financial crisis in progress. It is not a panic, but could turn into one at any minute.

• The US dollar is in free-fall against the euro, the pound and the Canadian dollar.
• The secondary market for mortgage-backed securities is dead.
• There is fear of huge losses when mortgage-backed securities are traded or valued at their market prices.
• House prices are falling rapidly and sales volumes have been cut in half.
• Forecasts for the fourth quarter (even ECRI) show little or no growth.
• Corporate earnings declined in the third quarter and are likely to continue to fall in the fourth quarter.
• Consumer spending is weakening, albeit only slightly at this point. But credit-card debt is rising fast.
• The prices of oil and other commodities are soaring (in US dollars). Gold is threatening its historic highs.

Be careful out there. I know I’ve said this before, but things keep getting scarier and scarier. We’ve got the faith-based economy and the reality-based economy. Something’s gotta give.