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There will be no escaping the harsh consequences associated with the bursting of a historic Mortgage Finance Bubble. Our Bubble Economy has been left severely imbalanced and acutely vulnerable, and it is simply impossible to avoid major disruptions associated with an abrupt curtailment of mortgage finance. California will be the poster child for this unfolding dynamic, although it will play out throughout the country. I’ll reiterate my expectation that upper-end real estate – too frequently Bubbles financed by ARM, Alt-A, teaser rate, reset and interest-only mortgages – will prove greatly more problematic than subprime. Commercial real estate will be anything but immune. We have only begun to experience upheaval from the mortgage bust, dynamics that will follow a similar path to the burst technology Bubble – except the wreckage will be significantly more widespread and economic impact broad-based.

Unprecedented central bank interventions and, here at home, six-week Bank Credit growth to the tune of $220bn have sustained financial system liquidity. I question the sustainability of both. Especially with this week’s apparent loosening of Credit conditions, there are great expectations for an impending revival in the securitization marketplace. The banks and Wall Street are praying. With an eye on California, I fear another ("jumbo") leg down in the ongoing mortgage crisis and an increasingly vulnerable economy. Another eye is planted on the hedge fund community, where I suspect we are only another market dislocation away from serious withdrawals and reinforcing liquidations.

One, if not the greatest, errors in central banking was committed back in 2002 – with Messrs. Greenspan and Bernanke at their respective strict and intellectual helms. They mistakenly reckoned THE bubble had popped. Together they set in motion an aggressive post-Bubble "mopping up" reflation, failing to appreciate that while the tech Bubble had burst THE Credit Bubble was poised for "blow-off" excess.

We are left today with an unbalanced Bubble Economy sustained only by ongoing and enormous Credit creation. Importantly, the Wall Street Risk Intermediation Machine is today gravely impaired, forcing the banking system to Balloon Bank Credit. This works effectively on a short-term basis, yet is an unfolding predicament. Credits to sustain a Bubble Economy are inherently highly risky (think CA mortgages or junk bonds) and it requires huge quantities of them. Bubble economies are replete with negative cash flow entities and others that become increasingly so as finance is curtailed and redirected. Today, the banking system is ill-prepared to play the role of lender of last resort for long. Moreover, the scope of required ongoing Credit inflation ensures dollar vulnerability.

An important aspect of my negative current view is the disconnect between unwavering marketplace confidence in the Fed’s capacity to "reliquefy" and "reflate" and the reality of a limited arsenal and atypical lack of Federal Reserve control over unfolding developments. Importantly, Greenspan and Bernanke expended tremendous ammo in a historic reflation fight that, in the end, was a totally wasted cause. They misjudged and enfranchised the most profligate and wasteful Credit expansion in our history, while inciting a potent strain of inflation that now propagates largely outside of our control. They burned a major currency devaluation. A weaker dollar could have been a tool available to help soften today's much needed financial and economic rebalancing. Unfortunately, they used that policy card for a reflation that greatly exacerbated excesses and imbalances at home, while initiating global inflation dynamics much to the detriment of our citizens, economy and currency. We have today much greater financial fragilities, disastrous economic imbalances, and a feeble currency – whether the stock market chooses to discount it now or not.

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