A Chart To Ponder Over The Weekend

It's been nearly 1.5 months since the SPY closed above the 20dayMA.

Also, when you draw the trendline from the top of September 19 to the top of October 14 and October 28, you'd see we are now above it. So, unless some nasty news comes out next week, we should go higher.

On Thursday, what we have almost look like a hanging man candlestick and would have been the perfect time for the bears to take the market down on Friday. But the bears failed to do so.

Trend analyze SPY...

Let's See How Far The Double BatWings Take Us

A possibly big down move is expected today.

Buy solars

ENER, STP, FSLR and SPWRA.

They likely gonna get a pre-election run up, which started yesterday.

Trend analyze the stocks...

Bears' Last Stand, For Real.

Yes, I now believe the ultimate low is already in. We're still in a bottoming process but the low will not be violated and we're set to have a really good multiyear rally.

The BEAR is dead, for good. This is "Bears' Last Stand" and the hole underneath them just busted wide open and they are falling in one by one. Sucked in like the Black Hole sucks anything in. Their fate is sealed. Goodbye Elliott Wavers.

It's time to get back in the market on any dips from this point on. But try not to buy leadership of yesteryear (like DELL, MSFT, ORCL, etc.) if you want growth, unless you're investing for dividends. The new bull market begins with new leadership, stocks that have never gone over 10 billion market cap is where you will find tomorrow's leaders.

This leads me back to alternative energy, specifically solars. Most traded around 5-10 billion market cap before they got the rug pulled under them, like STP and SPWRA. It's a great time to get some PBW, as we still don't know for sure who's gonna dominate the industry, although FSLR has a really good lead over all others.

I don't think the solars will be the first to lead, but their time will eventually come and it will be massive. Could be a couple months from now or a year from now. But it will be a certainty. Don't listen to idiots that say alternative energy is a fraud or scam or is dead. They are the ones who will be dead wrong, just like the morons at Goldman Suk said that oil was headed to $200 last year.

For the time being, i'll still be trading and investing in mostly the SPY and, to a lesser extent, UYG and XLF. The SPY is just awesome to trade. You never have to worry about gettin screwed by big overnite news like an acquisition (if you're shorting).

"The BatWings Formation"

Here's the Batwings Formation that I would trade on:

Fractals, Chaos Theory, And The "Black Swan"

I don't play The Lotto, but I know someone eventually always wins, against all odds. Likewise, I don't play the market expecting a "Black Swan" type of destruction, but I'm mindful that it will occur one day.

Scenarios For Monday

The charts are saying we should go higher on Monday.

DIA


SPY



The same thing with the QQQQ.

We got white bars with a red outline. These tend to be short term reversal bars. Since it was made from declining prices, we normally would see upside the following session.

I'm thinking about possible scenarios on Monday:

1) We gap up huge. That likely won't hold (unless it miraculously stays above the opening price) and will be faded. As soon as the market goes red, the bulls are screwed as that sets the stage for the late day plunge that will extend into Tuesday and beyond. If the market closes green on this gap up but below the opening price, that will also set the stage for a plunge the following day.

2) We gap down huge. We could rally back a bit like Friday. The best scenario is if we close green, but likely we won't because we couldn't do it on Friday's huge gap down. We close red, the bulls are screwed as that sets the stage for a plunge the next session and beyond.

3) Small gap up or gap down. Not likely scenario. As soon as the market sees red, the bulls are screwed.


Basically, we CANNOT close red on Monday.... or else.

The bulls have no choice but to put on a strong show on Monday, else their balls will be cut off. Green on Monday + Green on Tuesday is good. Very tough to do.

Feel free to add your own thoughts.


Trend analyze the SPY...

It's Not Over Till It's Over

Rushing into any market because it looks inexpensive or cheap is not the way to trade. Often times when you see weakness in the market, it means that the market is headed lower. The market we are looking at today is a classic case of a market that should have gone up (which it did), and then it turned dramatically lower.

There are always ways to make money in the markets and this eight minute video goes through each trade in the last couple of months and details how you would have made out in this market using a methodology that eliminates emotion and fear. The market we are covering in this video produced a gain of over $46,000 on an investment of less than $10,000.

You don't have to listen to the news and you don't have to watch cable. You don't even have to listen to gossip or tips on the market. All you have to do is follow some simple trading rules and the odds are you will do very well.

The video is available free of charge. We are leaving the video up for a limited amount of time. I strongly urge you, given the markets volatility, to watch this eye opening video as soon as possible.

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Every success trading,
Adams Hewison, President, INO

11 Minutes To Waste

When Nothing Goes Right....

Trade Exchange-Traded Funds (ETFs) Over Stocks

Take a look of this chart of the Dow Jones for this entire decade:



It took 3 years for the DJIA to lose 4000 points in the 2000-2003 Tech Wreck. It only took a little over 1 year for the DJIA to lose 6000 points from July 2007 to October 2008! The speed and magnitude of the decline was so outstandingly bad and nerve-wrecking that it may have transformed the landscape of the stock market for many years to come. We need a Jesus-type miracle for things to get back to the days of the 1990's. (Maybe Jesus lives in the Alternative Energy Movement?)

History is already made these last 15 months, from the Credit Crisis to the $VIX. Everyone kinda knew that the Housing Bubble would eventually end badly but very few have an inkling that its nasty tentacles could be this widespread. The Average Joe is always the last to get in on the game and he always ends up ruining the game.

I hate to admit it, but the market is in a manic depressive state and it's on Prozac. STP lost 25% today on a downgrade. A downgrade by somebody's unimportant butler named Steward Collins! I thought only huge outfits like Goldman Sach can hurt a stock that way. And normally, only bad earnings can do that to a stock.

From this point on, you cannot trust any stock. Until the market landscape really gets better, if I were you, I would trade (or invest in) mostly Etf's rather than stocks. I'm actually developing quite a bit of liking for ETFs these days, especially the SPY. Regardless of how bad the economy may get, SPY will not go bankrupt nor lose volume. If you're good, you can trade it forever and continue to make money for the rest of your life.

If the credit crisis continues, many of the companies we know (and love to trade) today could very well disappear in the blink of an eye.


buy this etf


Market Mayhem:

Video proof of Crude Oil's results

I just finished a new educational trading video on crude oil. This short video shows you all the Q3 trading signals that took place in this market. The results have been nothing short of spectacular. With gains of over 20,750 per contract, I think you'll understand why we are so excited about our "Trade Triangle" technology and this video. During the Q3 period we had six trades; four winners and two losers. The biggest gain was 13,160 a contract, while the biggest loss was 3,770.00. Q3 was a great quarter that produced fabulous results.


While our Q3 results were great, what is more impressive is our "Trade Triangle" approach has consistently produced positive gains for the past five quarters. With gains of 88,450.00 per contract over that last five quarters, you can see why we believe we have the perfect balanced approach to this market. That's what we are most proud of.

Enjoy the video: click here



Adam Hewison

PBW is a buy

PBW closed @ 11.15

This clean energy etf has come a long way down. With the election just about several weeks on the horizon, I wouldn't be surprised the etf makes a move to the upside.

It's a good trade as well as a good long term investment in alternative energy. I mentioned this etf for two consecutive sessions already. Congrats if you're in.

If short term trading is what you're into, then below 11 is the stoploss.


Trend analyze PBW...

Stop! Stop The Absolute Insanity!

Are you losing your marbles trading/investing in the stock market? Are you totally confused? Don't have a game plan? Every stock you buy goes down? Is your goal to trade the stock market full-time but it seems so impossible?

Does every stock trading service you join makes you lose more money? Are you sick and tired of being sick and tired of every stock market guru confusing the hell out of you?

Want to stop throwing your money on all those expensive money-sucking monthly membership trading/investing service sites once and for all? How about all these $3000-$5000 weekend seminars that supposedly teach you how to make big money, and you still don't and you're back to square one. How about jumping from one trading service to the next and then to the next? It is very possible to stop much of the insanity if you focus on what the simple Beanieville System teaches. Learning the "Big Picture" system first is so much more important than the specific trading methodology itself. When you get the big picture, everything else should follow.

This has been my experience, and I no longer subscribe to anybody's trading services. What would it feel like if you no longer have to depend on anyone for your trading or investing? Are you really learning anything if you have to subscribe to someone's expensive service month after month, year after year, with no end in sight? It has to stop somewhere, right?

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Last Leg Down?

After Friday's close, a Monday gap up is likely. However, I didn't make a Beanieville Overnite Daytrading call (for a Monday gap up) because I want to remain cautious going into this week. Many traders that use some form of "esoteric" technical analysis sees this coming week as a big plunge week where a new low is made (and also where the intermediate term bottom will be formed).

We should gap up on Monday after the big last hour selloff on Friday. If we gap down, right off the bat you gotta be thinking something is wrong and the bulls may have been trapped by most of Friday's rally. We'll know tomorrow, won't we?

Anyways, I want to talk about something about trading just very briefly. Visiting many blogs this weekend, I'm seeing emerging traders and bloggers looking to displace old and tired blogs (like mine?..lol). I'm seeing some guru bloggers/traders gaining popularity at the expense of long time bloggers/traders. This new breed actually calls the plays in advance, whereas the old ones only blogs in hindsight (Sorry, TraderMike and Maoxian).

Unfortunately, though, this new breed of blogging traders are making big and fast money using much riskier instruments like options and especially futures, where one wrong move could destroy your accounts. The newbies, who follow these gurus, start delving into risky instruments where they would normally trade only stocks. I highly suggest you don't do that. Use the gurus for their market calls, but futures trading is NOT for most of you, myself included. It's better to make money consistently and make it slower and lesser than to make fast money that can just as easily leave your accounts. Futures trading is a zero-sum game, where over 97% will lose all their money to the other 1-3%.

See ya Monday. I might make a new post before market open.

Linda Is One Smart Gal

Dear Beanieville readers...

I have not had the pleasure of meeting as many professional traders as Adam Hewison from Ino has. The good thing is that with the free version of INO TV, you can meet four of the world's top traders and have a front row seat to their seminars for free.

As a regular user of our INO TV service, I am a huge fan of professional trader, Linda Raschke. Honestly, I don't know why I put her in a class of her own among the other many amazing seminar authors.

It could be that she has had continued success in the trading arena for over two decades. It it could be that I am drawn to her superior presentation skills. It could also be that she is a great role model for young women pursuing a career in finance and/or business.

Ok, ok... I wont play the gender card. I am completely aware that over 91% of you individual traders are men. However, no matter what gender you may be you can recognize Linda's trading intellect and appreciate the tips and strategies in her seminar that we present in the complimentary version of INO TV.

"Classic Indicators - Back to the Future"

Besides lecturing to thousands of individual traders in over 18 countries, Linda is a principal trader for several hedge funds and is president of LBR Group, Inc. She was profiled in Jack Schwager's book, "The New Market Wizards," and frequently is featured trader in numerous financial publications and on national radio/television
programs. Currently she is the vice president of the American Association of Professional Technical Analysts.

Self-directed traders have spent big bucks to learn from Linda, but we are offering one of her lectures for absolutely no cost.

She is one of my INO TV personal favorite trading experts and I hope you will become fond of her as well.

Watch her seminar, "Classic Indicators - Back to the Future" today at no cost on INO TV.

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Enjoy Linda's Seminar,
Ino.com


Free stock trend analysis?
Learn To Trade the Forex With FREE $100k Demo!

A Trader's Market

Volatility is totally out of this world. You make lots of money if you're a good trader (day or short term trader) and you wanna kick your dog if you're an investor.

Nobody really knows what's gonna happen (nobody except the arrogant Elliott Wavers) or whether we've bottomed or is this the beginning of the end for the stock market with Dow heading to 2500 (Whaaaaaaaa? Shoot me now!).

I'd like to be hopeful and I'm hoping the recent low holds. But I won't be betting my nest egg on it. Gap fading and short term trading in this environment totally rules and that's what I'm doing mostly these days. The hedgefunds are basically doing the same thing with their retarded program trading. The rallies haven't lasted for more than two days. Could tomorrow be different with Google beating expectations? Maybe, but I wouldn't bet on it. Right this moment, my opinion is that we rally in the morning and fade in the afternoon. We'll see.

SPWRA has resistance at 54-55. If it doesn't break it tomorrow, I think you should sell it.

GOOG has first resistance at about 385-390. Somehow I don't think it will break above it, and traders will probably fade it at about that area. Hope I'm wrong and Google goes wild crazy and lifts the market out of the doldrums.


Trend analyze GOOG now...

You Know Why We Can't Seem To Get Any Upside Traction?

It's because the market wants to go LOWER.

Prepare for The Crash.

It should be a brutal day on Thursday, but that's not all...

Bear Arse-Kickin Time!

The bears overstayed their welcome and got their lights punched out today.

Breath-taking rally today with the Dow up nearly 936 points and the Nasdaq up 194 points on the government's new plan to stimulate inter-banking loans. Today's rally is confirmation of the reversal that started last Friday. Many people are thinking we're going up too far and too fast and likely headed down as soon as tomorrow. I don't think so. You gotta respect today's rally. If we were down this much, you'd be afraid to buy. So you should be very afraid to be shorting here. The tape is saying we're going higher and all dips ought to be bought from this point on.

The details of The Plan will be announced tomorrow and I think the financials, which rallied with a little bit of hesistation today, are gonna fly as a result. Two ETFs to look at are the XLF and UYG. Individual financial stocks just aren't safe in this environment. Anyone of them could be the next Lehman, so you're better off getting the exchange-traded funds that give diversification.


Trend analyze XLF and UYG now...

Did Everyone Survive Last Week's Carnage?

Buy MOO on the gap down

MOO closed @ 26

I like the way the etf is trading the last 4 days. Looks like there's support around the 25 area. If we reverse, this thing should go higher. With the market getting pummeled on Thursday, MOO didn't even get close to Wednesday's low of 25.25 . So i think this is probably one of the best buys out there.

Buy the gap down. Stoploss would be whatever the first 30 minutes low will be.

Trend analyze MOO...

Haul This Market Into The Asylum!

The selloff into the close was not a big surprise, because traders feared the removal of the short selling ban will bring in all the shorties and they'll slam the financials. Thing is, we are so oversold even without those guys. Have you checked the VIX lately? A record number of stocks made new lows today, similar to 1987. Yeah, eerie feeling isn't it?

Being oversold into the close, it wouldn't be surprising we get a gap up on Thursday. The Beanieville Overnite Daytrade methodology would call for a gap up as well, but I didn't want to recommend buying any stock for the gap up because for all we know we could be headed for a crash (and we already have two mini Black mondays). If so, it could happen anytime anyday this month. I'm more inclined to call overnite shorts than longs for the remainder of October.

I think we have to trade this market one (or two) day at a time. It's just the prudent thing to do, don't ya think? Everybody and their grandma know we are very oversold and a huge snapback rally can occur anytime now, but they're also aware that being this oversold could be a prelude to a Crash. Anybody that tells you they know what's gonna happen for the rest of October is either a gifted clairvoyant or asking for pain. My feelings, though, is that we print a new low sometime this month.

Let's face it, this year belongs to the bears. They don't get many years like this, where they can just close their eyes and short any market any stock and they've made money. As the saying goes, any bull can look smart in a bull market... the same is true on the other side: Any bear can look really smart in a bear market. As for the bulls, if you survive this unscathed, you are one cool cat. I'm generally a bull and this year I've been doing a lot of hedging my longs, which has decreased dramatically in recent months. I still like to play from the long side generally because I'm more comfortable doing that, and making short term profits with those hedges and daytrading shorts. This is how I roll and I wouldn't do it any differently.

So I see IBM beat earnings and is gapping higher, so looks like we're gonna gap up tomorrow. If we rally you want to buy some beaten down stocks like AAPL and MOS.

Trend analyze your stocks...

Rally Time

Amazingly, we now just had two back to back Black Mondays. Can you take more of this pain? This morning feels very much like Capitulation - massive relentless selling with fear everywhere. We now have a short term bottom but I'm not sure if it's the ultimate bottom or even the intermediate term bottom. Since this is sort of a Cramer-induced selloff, I'm not sure if this is the kind of capitulation that says buy buy buy a new bull market is born. Cramer capitulated this morning:

"Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now

I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market"




All we can do is to take the market one day at a time. We got lots of resistances to work against us bulls. As for me, I'm using north of Dow 10500 as a place to get comfy and below Dow 10,000 as a place to be very careful because we are now in an environment where we could easily see Dow 9000-8000-7000 or worst. When banks don't have the confidence to lend money, our economy can't grow and can grind to a screeching halt. This is why I thought the bailout package was very important. It may not do much to restore a whole lot of confidence right now, but it's a good start. Shame on the well-known bears who criticize this bailout - I think you people are real arseholes and have self-destructive tendencies especially if you live in the USA.

The great buys were this morning when the Dow was down over 700. We are not out of the woods yet, so keep an eye on the market pulse for when and if you should eventually dump those shares you bought this morning. Cramer capitulated because he sees things coming down the pipe that's gonna be really bad. The question is, will it be better 6 months from now?

Trend analyze your stocks now...



Most people can't trade successfully in the long run but this greatly enhances your chances.

Be A Born-Again BULL

Well, i was at the Apple Store (every other day) and it still looks as busy as ever, especially on Sundays. I still don't see close the amount of people putting up for-sale signs for their houses the last 2 years like I did in 2002-2003. The road is as just busy as before even with expensive gasoline (which is coming down right now to about $3.40 per gallon), and people still shop and dine at restaurants. Could this be a "fake" recession, or just the beginning of the horror that is to come? I don't know. But I do know this, investors are so incredibly negative now (over 50% are bearish and scared to death) and so much money (3-5 trillions) on the sidelines which will eventually need to be deployed unless fund managers don't want to be fund managers anymore and are closing shop enmasse. You and I have been through cycles like this several times before. When everybody is positive about the market, whether it be about oil, internets, or commodities, you know they're destined for doom rather quickly. The inverse should hold true, when everybody thinks the world is falling apart from its seams and doom and gloom is pervasive, there has to be light coming at the end of the tunnel.

I said to start nibbling in the market several posts ago, and I still mean it. I still think we will get our low this month, if Sept 29 wasn't the low. As long as you keep a longer term horizon in your (good) investments and don't employ margin, I believe you'll be fine. The time you're most scared of buying is probably the time you should deploy capital and buy (please no donkey stocks). This is where we are right now. Investors are scared sh%tless. Everybody, both bulls and bears, think we're gonna CRASH this week. If we do, then you would definitely want to buy. If we don't, you still want to nibble.

We know that the stock market will generally start a new bull cycle 6 months before the actual recession ends. So we have to forget about where we think the economy is right now, but rather, will the economy and housing be improving 6 months from now, especially when all the rate cuts, bailouts, and the Benanke moneyshower trickles into the economy?

How else can investors make money, without buying when everyone is fearful? They don't, unless they start buying now (or soon) when fear is pervasive. Warren Buffett already started his new investing in GS and GE. What about you? Have you nibbled on mighty fine businesses like SBUX or TGT?

I would wait to see how the market fairs this week. See if we can get back up and close above Dow 10500, which is a good sign to get back in.

Trend analyze your stocks...

The Great Depression Of 1873

The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS NELSON

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

[click here to continue reading...]

Tic-Tac-Toe

Tumultuous Times:



Bailout Bill:




Source

When The Ship Looks Like It's Sinking, Don't Wait

Millions held in hedge funds lockdown

By James Mackintosh
Published: October 1 2008 23:43 | Last updated: October 1 2008 23:43


An increasing number of hedge funds are telling customers they cannot have their money back as rising withdrawals and exposure to Lehman Brothers hit the industry.

In the past week, Amber Capital, the $3.2bn New York fund, Guy Wyser-Pratte’s $500m activist fund, a $400m fund run by London’s Cheyne Capital, and a slew of smaller funds have blocked redemptions temporarily.

The inability to access money has already had a knock-on effect: Absolute Return Partners’ Millennium Wave, a small fund of hedge funds, has had to tell its customers they cannot have their money back until it can retrieve it from the funds in which it invests. [click here to continue....]

The US Dollar Index

Watch the 2-part video on the Dollar

The 48-Hour Challenge

So you haven't gotten the Beanieville System - the Real Secret to Making Money in the Stock Market that makes all the other approaches seem like child's play? Yeah, I mean it. I really mean it.

Timothy Sykes made 130% trading penny stocks the last year. It's pretty good, but with lots of hard work putting in the research everyday. Do you want to clobber those returns by trading stocks under $10? I'll show you how, in the manuscript. It really isn't that difficult (although I personally myself no longer trade stocks under $10 but that doesn't mean you can't), and it doesn't require the type of extensive daily research he does on stocks.

I GUARANTEE the Beanieville System is the most simple and powerful approach to the stock market you've ever seen. Here's the 48-hour challenge to you: If, within 48 hours after receiving the manuscript, you can find a simpler, more logical and more powerful approach (for the short and long term) to the stock market out there than the Beanieville System, I will gladly offer you a complete refund. You don't even have to send me back the manuscript. This offer ends midnight October 10, 2008.

You got hardly anything to lose but everything to gain. click here now


* Certain restrictions apply. If you think you know an approach better than the Beanieville System, you must email me at beanieville@gmail.com within 48 hours of receiving the manuscript to qualify for the refund. If I'm convinced it's better, then I'll issue the refund asap and I might even recommend the new approach to my readers.

The Market has Kickmyballsitis Syndrome

Unfortunately for the bulls, I think it's possible we could see Dow 7000 eventually, if we don't firm up soon and we get a new low from here. The economic fundamentals are horrible. Even Warren Buffett appeared worried. The credit market is a killer. Earnings are coming up, and it looks like the hedge funds are gonna slaughter everybody. If we get the bill passed and if we can move higher on bad earnings, that's a very good sign of a turnaround.

It could be the reason the market doesn't seem like it's going higher is because it really really wants to come down alot lower.

I'm still hopeful that we bottomed, but I'm no fool. I'll be watching the tape.

Please don't use margin, especially this month.


Trend analyze the DIA...

Let's Talk Tennis Instead

We Are At The Brink Of The Next Great Depression?

The following article is absolutely wonderful because it explains clearly what is going on right now, and why we really need the $700 billion funding and why we need Americans' confidence more than ever, as opposed to all the hogwash distractions the the bears are offering. Our government is trying the best it can for us to avoid living in terrible times, like that of the Great Depression:


In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street's problems were starting to spill into the broader economy, Mr. Mishkin's store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin -- Meyer's grandson and, until he stepped down a month ago, an ally of Ben Bernanke's on the Federal Reserve Board -- told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

All of which may be true. But there is good reason for the public's skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they're so afraid.

It's not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.

Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis -- how A can lead to B, B to C and C to Depression.

Let's give it a shot, then.

Why are we talking about the Depression, anyway?

Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover's day. So a Depression-like contraction -- a 30 percent drop in economic activity -- is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you're not likely to see shantytowns.

But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad -- or, in some cases, were rumored to be going bad -- and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.

Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren't nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn't know which borrowers were less reliable than they looked. Credit dried up.

"If a guy has a good investment opportunity and he can't get the funding, he won't do it," Mr. Mishkin, who's now an economics professor at Columbia, notes. "And that's when the economy collapses." Or, as Adam Posen, another economist, puts it, "That's when the Depression became the Great Depression." By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.

As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers' lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as "informational capital." In plain English, it means that trust vanished from the banking sector.

The same thing is happening now. Financial markets are global, not local, today, so the problem isn't that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months -- the sort of turmoil that once would have been unthinkable -- have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don't even know you.

Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn't, and they weren't.

The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed's takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise -- and these rates, not the stock market, are really what you should be watching.

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren't some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday's collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

The crucial point is that a modern economy can't function when people can't easily get credit. It takes a while for this to become obvious, since most companies and households don't take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.

Could the current crisis lift -- could banks decide they really are missing out on profitable investing opportunities -- without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that's as inexpensive and as tough on Wall Street as possible? Absolutely.

But in the end, this really isn't about Wall Street. It's about reducing the risk that something really bad happens. It's about limiting the damage from the past decade's financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.

"We are facing a major national crisis," as Meyer Mishkin's grandson says. "To do nothing right now is to do what was done during the Great Depression."


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