The exchange below comes from an independent research firm and speaks very intelligently to the idea that the first few innings of the current credit bust process were limited to financial market issues (and the negative feedback therein) and not about the larger, real economy and the negative feedback that would take place with actual credit losses.

Commercial real estate and consumer (non-mortgage) loans are two places where this negative feedback loop into actual credit losses could become much more pronounced in 2H:08 as the next stage of the credit delevering process begins.

IRA: So what is the Rosner view of the world? The party line in Washington and on Wall Street is that everything's fine and we'll return to normal growth in the second half of 2008.

Rosner: I see troubles radiating outward. What I mean specifically is that there is no functional change in the problems in the mortgage markets. What is really making us feel OK, at the moment, is the fact that banks are destroying shareholder capital and that they are raising new money. That's all well and good, but we still have not changed the underlying reality, namely that most of the losses taken so far are due to mark to market issues. We have not yet really seen the bulk of the underlying credit losses.

IRA: Ditto. We have been talking about this for six months, but there seems to be a refusal on the part of many observers to accept that the losses reported to date have been primary trading book write downs vs. actual charge offs of loan losses. Citigroup (C), for example, did just 120bp in aggregate charge offs in 2007.

Rosner: There is a lack of appreciation or maybe a lack of understanding between these two issues, mark to market losses and actual credit losses, and we need to distinguish between these two issues. I continue to believe that we are going to see further downward pressure on home prices -- regardless of what the Congress believes or intends or manipulates. Unless we actually nationalize the housing industry, there is not much we can do to avoid the downward correction in home values.

In answer to the implication that Wall-Street and Washington are set on a second half recovery when, to these researchers and yours truly all the evidence points to something much larger and insidious, I offer a few thoughts on the great dumbing down of the market where volatility (on the upside) is being confused with information. I was once a great believer in the market discounting information correctly. I no longer am.

1) Never before have central banks and other non-economically-driven entities created so much "money" for themselves and bought risky assets with it. From Middle East oil money to China's Communist Party, these neophytes to economic cycles and value are simply recycling fiat money back from foreign currency reserves. There is a quasi-political driver that creates a strong propensity to put those fiat reserves back into dollars to retain export market share.

2) Never before have those institutions been set on a path of reflation and embarked on policy so strained as to be nearly illegal to assure markets that anything will be bailed out and that any risk aversion will be punished. Paul Volker just stated in a speech, "The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices."

He went further to call the current credit turmoil the "mother of all crises" and said the financial system has "failed the test" of the marketplace. This goes hand in hand with a media that is incompetent in communicating the true nature of the situation.

3) Never before has the populace in general been so in debt. This numbs them to really bad news where they wish so hard that things are going to be OK they must ignore the facts.

4) Mutual funds, large institutions that hold vast quantities of stocks, don't get paid to hold cash and are now conditioned to put any money right into stocks. They no longer think about protecting capital and therefore don't care to try to understand implications. They will not sell until forced from redemptions, which may be coming right around the corner as people need funds to pay back debt. That is what all that money in money markets is for while there's no real savings: the money in money markets can be circled around to being generated by debt.

5) There's obfuscation from government reporting of statistics.

6) There's a lack of experience by all market participants as to what a credit crunch really is, for there hasn't been a real one since the 1970s or a really big one since 1930s.