Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis.!


Throughout 2004, 2005 and 2006, those initial indications grew into clear signals that the peak in 2000 had  been a seismic shift between what we have in the past referred to as ‘real’ and ‘paper’ assets. Although stocks continued to rally higher in those years, they gained ground only when nominally priced in dollars.  When stocks were priced in other real assets, they were making little headway—and in some cases were continuing their decline unabated. One such case was stocks priced in gold.  During the 20 years from 1980 to late 1999, stocks in the Dow Jones Industrial Average had increased close  to 45 times in value versus gold, as can be seen in the chart below of the Dow/Gold ratio. During the 2000-2003 bear market, stocks lost over half their value in value relative to gold—a performance that is not out of character for a cyclical bear market.  However, as you can see in the red circle on the chart, as stocks rose from their lows in 2003 they only managed to tread water against gold. Moreover, while the rally continued through 2006 and 2007, stocks were declining to new lows against gold.


“Freefall” has three standout strengths. First, it is a powerful indictment of Wall Street, the United States financial sector and the Federal Reserve Board. Second, it offers a reluctant but persuasive elaboration of how the Obama administration decided to embrace the financial sector and the Fed, continuing and enlarging both the bailout and the too-big-to-fail philosophy that it inherited from George W. Bush. Finally, it is a blunt attack on Stiglitz’s own profession, for transforming “scientific discipline” into “free-market capitalism’s biggest cheerleader.”  Admittedly, indictments of Wall Street and the Fed have become a staple over the last six months. But Stiglitz’s virtue is that he minces few words. Fed policies worked only by “replacing the tech bubble with a housing bubble,” he says. “In virtually every interpretation of the crisis, the Fed was at the center of the creation of this and the previous bubble.”


The Author views the 2009 rally as nothing more than a dead cat bounce that has been fueled by government stimulus, quantitative easing, accounting trickery and unprecedented investor optimism. But faith in the markets seems to be running a little thin lately, as the rally begins to lose steam and reality begins to set in.

Not even news of 5.9% GDP growth in the fourth quarter of 2009 was enough to buoy the markets, as the S&P 500 ran into stiff resistance around the 61.8% Fibonacci retracement level and has dropped nearly 8% in the two weeks since. This decline is the most severe in the shortest time period since the “recovery” began.


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: