“You’re gonna need a bigger boat.”
--Police Chief Brody, Jaws

Sir Isaac Newton offered that for every action, there is an equal and opposite reaction. His laws were clearly created before the advent of derivatives.

The free market system officially broke last week and the ramifications are profound. A new world order is upon us, one that will forever change the construct of capitalism.

We often say that to appreciate where we are, we must understand how we got here. That isn’t a quick conversation or a sound bite; it’s an educational evolution we must all take responsibility for.

That is why we provided a contextual backdrop last week and it’s precisely the reason we created Minyanville.

Discussing the fragility of the financial fabric is a moot point. While the blame game percolates in political circles, the rest of us are left to stress through the mess.

There will be massive opportunities on the other side of this ride. Our goal is to persevere this process of price discovery and be in a position to prosper when the eventual recovery arrives.

As many issues vie for our collective mindshare, we’ll break them down into five things you need to know about our current state of affairs.

Will The Government Bailout Work?

We’ve long offered that the only true solution for what ails the market is debt destruction and opined that this dynamic would come to a head in September when corporate credit came due.

While that ultimate destination is unavoidable, the path we take to get there remains an open question. There are two alternative scenarios, neither of which is particularly pleasant to ponder.

The first is credit cancer that eats its way through various sectors until the body rids itself of disease. This has been in play for years and has spread from homebuilders to banks to technology, retail and other industry segments within our finance-based economy.

The other is a car crash that causes credit to freeze as capital markets seize, price discovery permeates and social mood shifts as the magnitude and consequences of the new world order manifests throughout the financial and societal structure.

The critical diagnosis was evident for years but few policy makers paid attention until after the patient was rushed into the emergency room.

After administering ad hoc drugs with hopes of masking the disease, the government is now attempting to buy the cancer and sell the car crash. If they didn’t implement a comprehensive overhaul, global equity markets—tied together with $500 trillion of derivatives— would have experienced a cataclysmic crash.

That outcome remains within the probability spectrum—they may have been too late—but the likelihood has been reduced, albeit not without profound cost. Government officials are attempting to buy time, snuff out the fuse and stem contagion that has spread like the plague to every corner of the earth.

Price discovery is a process rather than a point and a multitude of factors will affect the ultimate outcome. While we can debate the merits of the proposed plan, we must remember that it introduces the possibility of regulated containment that didn’t otherwise exist.