from Dr John

"When we analyze the financial crisis and subsequent recovery, the key events are actually very clear. In March 2009, the Financial Accounting Standards Board bowed to political pressure and removed “mark-to-market” accounting requirements, loosening U.S. accounting rules to allow banks “substantial discretion” in how they valued the distressed assets on their books, and making it possible for them to avoid insolvency even if they were in fact insolvent. Since then, banks have largely refused to restructure mortgages and other loans, and the Federal Reserve’s zero-interest rate policies have allowed banks to gradually recapitalize themselves on the backs of savers earning zero-interest and homeowners locked into higher-interest mortgages. Many of these banks should instead have been restructured, at no loss to depositors, and with bank bondholders bearing the cost.

The Fed did not save the economy. Rather, the Financial Accounting Standards Board rescued the banks by making their accounting more opaque. The Fed’s policies then shifted the costs of financial recklessness onto those who are not financially reckless – particularly ordinary savers and the elderly on fixed incomes, while the economy has more or less floundered. The Fed’s policies aren’t to be hailed as virtuous efforts that saved the economy – they are more appropriately reviled as unethical policies that subordinate Main Street to Wall Street.

Regardless, Fed policy is what it is, and it is more productive to accurately estimate its effects and respond accordingly. On that front, even during the most recent market cycle, the general hierarchy of considerations has remained intact, in that market internals and trend-following considerations have outweighed monetary ones – on average – when the two have been in conflict. While overvalued, overbought, overbullish syndromes have historically outweighed both trend-sensitive and monetary factors, my impression is that the relative ineffectiveness during the past 18 months or so is an artifact of a mature, half-finished cycle still near its highs, and that investors will wish they had paid more attention to these factors (and the wicked losses that followed historical counterparts) by the time the present cycle is complete."

http://www.hussmanfunds.com/wmc/wmc130708.htm