My 17th Level Mutual Fund Manager Stops To Loot The Corpses

US markets have rebounded solidly in the Mother Of All Dead Cat Bounces.

A snapback in stocks wasn't unexpected as carnage on Wall Street often attracts bargain hunters, though questions remain about how investors will proceed. Without a bailout plan in place to absorb soured mortgage debt and other bad loans from banks' balance sheets, investors are wondering what might restore confidence in lending.

While stocks turned higher, moves in the credit markets were more ominous. The benchmark London Interbank Offered Rate, or LIBOR, that banks charge to lend to one another rose sharply Tuesday, making it more expensive and difficult for consumers and businesses to borrow money. In addition, credit card debt and more than half of adjustable-rate mortgages are tied to LIBOR, so an increase isn't welcome for many consumers.

LIBOR for 3-month dollar loans rose to 4.05 percent from 3.88 percent on Monday. LIBOR for 3-month euro loans, meanwhile, rose to 5.27 percent, from 5.22 percent Monday.

Many on Wall Street had expected the government's plan would help sweep away some of the fear and pessimism that has hobbled credit markets, which are where businesses turn to finance their day-to-day operations. The worry is now basic operations like making payroll will be difficult or perhaps impossible for some companies. Critics of the plan said, however, that it was too costly and wouldn't have done enough to jump-start lending.

Credit markets are still locked up and will remin locked up. If something isn't done to lower the LIBOR and soon, everything else will become academic.

Even worse, the source of every single one of these systemic problems can be traced back to the housing depression, which continues to rage on.

House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

And if banks stiffen their lending rules because of more bad mortgage paper writedowns, the credit markets lock up even more.

As important as it is to break up the LIBOR lockup blood clot to prevent an economic heart attack, it's just as important if not more so to realize that the heart itself is the housing market, and that heart is diseased. A very expensive transplant of sorts may be needed, or at least major bypass surgery...and the patient's insurance is held by the Chinese, y'dig?