On March 4, 1933, President-elect Franklin Roosevelt was greeted with grey, cold, overcast skies. The feeling of despair and hopelessness in Washington was so palpable in the air that First Lady-to be Eleanore Roosevelt later said she felt like crying during the Inauguration Parade down Pennsylvania Avenue.
No one realized it at the time, but the Great Depression was at its nadir. That nadir was marked by what was to be the greatest inauguration speech ever given. It was a message of hope, leadership, and fairness, as well as a denunciation of the "money changers" and the need for regulating the financial markets.

But mostly it was a call to do the exact opposite of what Congress chose to do this week.

Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
- FDR, 1933

You would think that people might learn from the mistakes of past credit abuse. You would be wrong. We are doomed to repeat the failures of history again and again.

Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.
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inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit -- the raw material of bank lending -- is growing at the year-over-year rate of 61 percent.

Credit growing at a 61% rate may sound pretty scary, but that's a y-o-y number. If you look at the year-to-date number its growing at a 77% rate, almost all of it in just the last month.

It took the Federal Reserve 95 years to build about $850 Billion in reserve assets. It took only a single month to add another $515 Billion.
Nothing like this has ever been done in America. Never before has the Federal Reserve, which was chartered in defending the integrity of our currency, decided to print money without limit.
The consequences are beginning to show up in the credit-default swap market, and it will soon show up in the price of goods.

Speaking of the CDS market, a Day of Reckoning of sorts is about to arrive.

The $54,000bn credit derivatives market faces its biggest test this month as billions of dollars worth of contracts on now-defaulted derivatives on Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual are settled.
According to dealers, insurance companies and investors such as sovereign wealth funds, which are widely believed to have written large amounts of credit protection through credit default swaps on financial institutions, could have to pay out huge amounts.
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The "auction season" starts tomorrow, when the International Swaps and Derivatives Association has scheduled an auction for Tembec, a Canadian forest products company. This is followed by Fannie Mae and Freddie Mac auctions on October 6. Then, Lehman is settled on October 10, and Washington Mutual is scheduled for October 23.

This enormous settlement of these CDS contracts could blow up in a big way. The derivatives market, of which credit defaults swaps are a big part of, was completely deregulated in a procedural move by Phil Graham in 2001 called the Commodity Futures Modernization Act. With no regulation, there was no one to say that parties that owned the swaps had to have the capital to cover the losses in the event of a default.
Many CDS holders just flat out don't have the capital to cover the losses in the event of a credit default. They hedge for this in their models by shorting the stocks that they own the swap on. At least that was the way it worked before the SEC ban on shorting stocks.