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The unfolding Credit Crisis has necessitated the sequel "Committee to Save the World Part Two." Especially after the Credit system took a turn for the worst last week, I can understand Secretary Paulson’s urgency to have institutions renegotiate mortgage terms with troubled borrowers. But not only are we too far into the mortgage bust for such efforts to pay much in the way of dividends, I am skeptical that our securitization markets have the necessary infrastructure and legal structure to equitably adjust mortgage terms on millions of loans. And it is becoming increasingly clear that a large segment of troubled loans today involved some degree of fraud at origination. Besides, there is simply not much time to sort through all the various details. Examining the startling almost $92,000 two-month drop in California median prices, it's apparent that momentum generated by the The Great Housing Bust is not to be impeded by a program to check subprime mortgage resets.

Such efforts, however, obviously have major impacts on the markets. I can’t imagine more challenging market conditions or ones more fascinating to try to analyze. It was quite a "squeeze" this week in stocks, Credit instruments, currencies and commodities. The way I see it, there is today a great and destabilizing dichotomy. On the one hand, the Credit crisis and severe impairment of key sectors in the Credit system ensure major liquidity constraints, faltering asset markets, and an arduous economic adjustment period. On the other hand, years of egregious Credit Inflation have created an incredibly bloated financial apparatus (domestically and internationally) determined to disregard new realities.

This "system", importantly, is especially indisposed to succumbing to boom-turned-bust dynamics. Or, stated another way, our Wall Street dominated financial apparatus is keen on "Inflate or Die" dynamics and has no intention of relinquishing the tremendous power it has gathered over the years. This is understandable, although it certainly creates a very serious problem when it comes to the stock market refusing to adjust to rapidly deteriorating underlying fundamentals. And if market dynamics preclude an orderly stock market revaluation, expect it to come at some point violently and with great hardship. This is one aspect of the great costs associated with the Fed moving aggressively again to "reflate." It won’t work, its further subverts the market process, and only worsens an already perilous situation.

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