Huge 2-day rally from unprecedented market intervention

One of the biggest 2-day rallies in market history is underway as the government finally admitted what we've been saying all along: we are in the midst of a crisis far bigger than the savings & loan debacle, and a bubble much bigger than the tech stock bubble is bursting.

The government's creation of a Resolution Trust Corporation twin for mortgage debt is the final capitulation. It's what's been needed all along but they hoped they could do without, because it makes clear that the entire world financial system was in jeopardy if there were not some organized means of sweeping away the toxic debt.

Another signpost of how worried policymakers were getting is the temporary ban on all short sales of financial stocks. So certain companies are getting another goverment benefit for free. Or rather, like the gargantuan bailout that is to ensue, on the taypayers' tab. It's impossible to put a dollar value on a short-sale ban for a company's stock, because no one knows to what extent short sales affect a stock's price. Some believe there is no effect; others believe the effect can be large. The uptick rule, or lack thereof, is another complicating factor for which there is no consensus. It's amazing that we have this monstrous, important financial market that no one really understands.

But that, of course, is how we got into the current mess, isn't it?

Which, by the way, two spectacular days of gains isn't about to solve. It probably signals a temporary turnaround: this week's lows will be another step on the way down, but for the next few weeks or months these lows won't be tested. We're out of the woods for now, and watch for the next round of pundits to say that these are the bear-market lows and it's only up from here. Comparisons to the S&L crisis, which overall left the stock market unscathed, give that viewpoint some ammunition. But the cost and overall reach of this crisis, caused by the bursting of the housing bubble, already dwarf the S&L crisis, which had a total cost of just $160 billion dollars (about $250 billion today). This one will end up costing at least $1 trillion. The recession that we're already in will deepen, and the world economy will feel the effects.

Don't let anyone tell you it's over. We're not headed for another Great Depression, either; the stock market won't lose 90% of its value. But 75% is a possibility.