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Surely, the Fed today lacks the flexibility it enjoyed in 2001. Housing Bubble vulnerability is keeping it from actually tightening financial conditions, leaving "terminal phase" Credit excesses to run unchecked. At the same time, one would assume that speculative excess will hold easing impulses at bay. I am left with the uncomfortable feeling that – with U.S. mortgage, govt., corporate, financial sector and global Credit Bubbles now largely synchronized – the long-overdue initiation of the Credit cycle’s downside will be systemic in nature and likely triggered by some market development.

Thinking back to Dr. Poole’s comment that "derivatives markets are an important source of information," I believe that highly speculative Derivatives markets at key junctures provide especially misleading pricing signals. These days, for example, a squeeze on those on the wrong side of the global collapse in Credit spreads is only exacerbating the mis-pricing of Derivatives "Insurance" and risk generally. At the same time, an unwind of speculations is distorting the energy and commodities markets. Meanwhile, a short squeeze is inflating the stock market value of scores of companies – many with questionable fundamentals – in the process encouraging a misallocation of resources reminiscent of the 1990s (but much more broad based). And the Treasury market gyrates daily on rumors of hedge fund liquidations and problems, while currency traders bet on the prospect of the dollar bears getting squeezed.

I know of no other period marked by such pervasive market pricing distortions. As I’ve argued all along, unlimited Credit/"finance" and unchecked leveraged speculation are The Bane of Free Market Capitalism. Yet it’s amazing how recent Monetary Disorder (inflating stock markets) has the "free market" bullish crowd filling the airwaves with flawed analysis and wishful thinking.

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