A hard and fast rule that I have adhered to during this deleveraging and default period is … whatever is the most destructive to the greatest number of participants is the most likely.

Examine the long run- up to the crisis in 2007; the declining real wages and expansion of credit as a substitute, the oil price surge and rise in interest rates, the squeeze on mortgage origination, the hypertrophic expansion of high- yield mortgages and mortgage- backed securities then decline … followed by mortgage industry collapse, a massive energy price spike, deflation and collapse of Wall Street institutions into ‘familiars’ of the Treasury Department.

Any alternative course to what was actually taken would have been less destructive. The recession would be milder, there would be fewer unemployed, there would be greater GDP growth, there would be greater wealth in the hands of working people. 

A consequence was a demoralized and confused electorate. Worse, was a demoralized and confused mandarinate, who lacked the insight to identify the fault- lines in the programs they crafted. Decision making reduced itself to Keynesian reaction. Any examination of what underlay the unwinding was postponed or cancelled. 

Now it seems that the end of the crisis is coming into view.

Bernanke sees early signs of stability

Demand in the US “may be stabilising” Ben Bernanke said on Tuesday, in guardedly optimistic remarks that suggest the recession is likely to end this year. 

The Federal Reserve chairman highlighted the recent recovery in consumer spending and said there were “signs of bottoming” in the housing market. 

His comments came as main money market rates fell to record lows underscoring recovering confidence among bankers.

The three-month dollar Libor – the interest rate banks charge each other for three-month dollar loans – on Tuesday fell below 1 per cent for the first time. Sterling and euro rates were also lower. These rates form the basis of actual borrowing rates for many households and businesses.

In testimony to Congress, Mr Bernanke said banks no longer appeared as concerned about each others’ near-term solvency.

Here’s another:

Where Home Prices Crashed Early, Signs of a Rebound

SACRAMENTO — Is this what a bottom looks like?

Robert Durell for The New York Times

This city was among the first in the nation to fall victim to the real estate collapse. Now it seems to be in the earliest stages of a recovery, a hopeful sign for an economy mired in trouble and anxiety. 

Investors and first-time buyers, the traditional harbingers of a housing rebound, are out in force here, competing for bargain-price foreclosures. With sales up 45 percent from last year, the vast backlog of inventory has diminished. Even prices, which have plummeted to levels not seen since the beginning of the decade, show evidence of stabilizing.

Indications of progress are visible in other hard-hit areas, including Las Vegas, parts of Florida and the Inland Empire in southeastern California. Sales in Las Vegas in March, for example, rose 35 percent from last year. 

“It’s fragile, and it could easily be fleeting,” said an MDA DataQuick analyst, Andrew LePage. “But history suggests this is how things might look six months before prices bottom out.” 

Hope for housing was on full display in the stock market on Monday. News that pending home sales rose in March instead of falling, coupled with improved construction spending, propelled a strong rally. One broad market average, the Standard & Poor’s 500-stock index, is now in positive territory for the year, after being down 25 percent on March 9.

Human beings are so charming. The sun will always shine tomorrow. Tomorrow will always be a better day.

Perhaps, perhaps, not. Considering that the current situation has been simplified into a mortgage-credit seizure and a platform for economics- as usual there is little chance that any real examination of underlying conditions is taking place. In Sacramento and elsewhere, second- tier speculators rush in where angels fear to tread. As for the stock market, it is hyped beyond all sense.

It requires a look behind the curtain to see what’s really going on. Contrary Investor Dot Com (thanks, ZeroHedge)  makes a case for a Fed crafted Potemkin village designed to impress the peasants. It has dramatically expanded its balance sheet and plugged holes in various credit markets:

The Fed is creating the impression or perception of healing in pockets of the US credit market. For those not willing to or literally unable to understand what is happening behind the scenes, many a headline credit market perception is actually a misperception when a light is actually shown on the facts of these various market segments. Where the Fed is involved, the perception of healing or stabilization can be created. Where they are not involved (corporate markets), continued stress is still plainly visible. In the endgame, credit market investors are smart. They are less emotional than equity investors. We believe many know exactly what is going on and the true character of supposed healing that has taken place with the Fed sticking all of its fingers in the US credit market dike that has cracked and has certainly not been repaired.

Consider also, that the trigger for the current situation was a steady runup in energy prices from 2002 – a price level that forced the Fed to raise interest rates and torpedo mortgage lending. Consider that the oil price level that caused the problem beginning in 2006 would be considered cheap, today …

There are a lot of problems that have not been examined or dealt with. A period of complacency is most dangerous. A sense of normalcy will stimulated energy consumption driving demand and causing price stress to flow thoughout the systems dependent on energy.The allocation battle, between producers and inflation … and users and deflation … is about to begin. 

Since the most likely outcome is the most destructive, this battle is likely to be bloody.