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The U.S. Credit Bubble was punctured this past summer, as the Mortgage Crisis escalated from the confines of subprime to the expansive marketplace for Wall Street "private-label" ABS and MBS. Especially with the bursting of the Florida and then California housing Bubbles, literally Trillions of mortgages, sophisticated debt structures, Credit insurance, various financial guarantees, leveraged speculative positions, and bloated Wall Street balance sheets were in almost immediate peril. Contagious deleveraging overwhelmed the system. In a brief period of only several months the U.S. Credit system went from unmatched expansion and speculative excess to the brink of implosion.

Last week, I made the case for thinking in terms of the end of the first Stage of the Financial Crisis. The epicenter of this initial upheaval was in highly leveraged positions in mortgage Credit exposure - encompassing mortgage-related securities positions (i.e. ABS and MBS); sophisticated Credit structures (i.e. CDOs, "SIVs," REITs, etc.); various derivatives exposures (i.e. subprime ABX indices, Credit default swaps, synthetic CDOs, etc.); and a broad assortment of financial guarantees and liquidity agreements (monolines, mortgage insurance, asset-backed CP, cash-equivalent funds, etc.). I have referred to this as the breakdown in Wall Street-Backed finance.

This collapse had reached the cusp of bringing down the entire Credit system. In stark contrast to traditional Credit crises, this one engulfed the entire system before the general economy so much as succumbed to a negative quarter of GDP contraction. To stem implosion required nothing less than a Fed-orchestrated bailout of a major Wall Street firm; the opening of the discount window to the securities firms; the implementation of massive liquidity facilities at home and abroad; the promotion of mortgage securities as collateral for borrowings from the Fed; assurances of enormous market intervention (mortgage purchases and guarantees) by the troubled GSEs; the imposition of significantly negative real short-term rates; and open-ended federal government stimulus and financial guarantees.

An argument could be made that, while dramatic, these measures were not world changing. I would counter that such measures gave assurances to the marketplace that the Federal Reserve (along with global central bankers) and our government policymakers were willing take any and all measures necessary to stabilize the Credit system and sustain the U.S. Bubble economy. There were no longer any bounds on government intervention.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.