While the U.S. banking system was severely impaired to begin the nineties, this fact did not prove bearish for the economy, the markets or federal government finances. A historic “Wall Street” Credit Bubble was cultivated and then championed by the Greenspan Fed. This massive expansion of Credit created abundant liquidity for spectacular asset Bubbles, a dramatic inflation in government receipts and spending, and a consumption boom like the world had never experienced. And, importantly, the reflationary boom in Wall Street finance worked to repair and rejuvenate the bank Credit-creating mechanism – until last year's collapse left everyone (but the federal government) starved for Credit and liquidity.

So what about today? It’s not difficult for an increasingly speculative stock market to dream it’s 1991 all over again. Many believe the economy’s previous growth trajectory can be reestablished and the great bull market resumed. Others simply see a very fruitful speculative backdrop. Most believe that the recovering markets are a reflection of growth prospects and that the buoyant stock market is discounting the return of the economy to sound footing. The bullish consensus believes economic recovery will work to cure housing and financial sector ills, as it did during the nineties.

I believe the bullish consensus is misguided. First and foremost, it is the Credit system driving the real economy - not vice-versa. Only massive fiscal and monetary stimulus was capable of stabilizing the system. Total non-financial Credit expanded $470 billion 1991. It is my view that the maladjusted U.S. “Bubble” economy will require non-financial Credit growth of at least $2.0 TN this year. With the banking system and Wall Street finance severely impaired, “federal” (Treasury, agency, GSE MBS) Credit will account for the vast majority of system Credit growth this year.

The unprecedented expansion of “federal” Credit has stabilized the system and incited a speculative run in the stock market. But I just don’t see the mechanism for private-sector Credit to recover to the point of carrying the heavy load necessary to sufficiently finance the gluttonous U.S. economy. I don’t see a new boom in Wall Street Credit instruments in the offing, and it’s difficult to see how bank Credit can recover adequately on its own. So, as far as they eye can see, the system is left with “federal” Credit.

I expect this week’s dire deficit projections from the White House and CBO to this time be much more on the mark. I also believe it matters greatly to both the U.S. economy and markets that our government has become the predominant source of system finance. Granted, it may not matter so much right now as artificial recoveries flourish in the markets and economy. But those believing the stock market is forecasting a happy ending to this, the latest stage of the Bubble, will again be disappointed. I haven’t forgotten how the Wall Street boom papered over a lot of problems and structural issues.