Bittersweet Surrender

The Germans, who had initially sniffed at Ireland's blanket guarantee of bank deposits, had by Monday turned into obedient followers.

The Federal Reserve, which until seven months ago disdained collateral other than Treasury bills, will now buy unsecured commercial paper -- basically corporate IOUs -- to park besides its growing pile of dubious mortgage securities, some held as collateral and others owned outright courtesy of Bear Stearns and AIG.

And then there's Iceland, cozying up to "new friends" in the Kremlin for an economy-salvaging loan after getting spurned by "old friends," which could be us, I fear. Iceland's been virtually cut off from the international banking system because its economy isn't big enough to support the impaired assets of its banks. Whereas we're plenty big enough to absorb credit losses now estimated by the IMF at $1.4 trillion. Why, Bank of America is a private corporation still, though it's in a bit of a funk today as it peddles $10 billion in new shares following a dismal earnings preannouncement and dividend cut. (Here I'd like to thank the bank again for its latest interest-free loan, the biggest in a long line it has extended to this occasionally solvent correspondent.)

The Fed, of course, has been pumping out "liquidity," aka credit, like it has been going out of style, which it has. So far, the market's reaction to its plan to buy commercial paper betrays deepening doubts about any and all official interventions, including the $700 billion U.S. bailout, the increased deposit guarantees and explicit government backing of the largest banks. The morning's rally is history, with B of A shares down 15% and the Royal Bank of Scotland shares savaged 41% in London. Cynicism about governments' power to put things right now seems as extreme as the optimism a year ago during the last, rate-cut-fueled bull market rally.

The selling pressure has been so extreme, the buying so non-existent of late that even cynics are beginning to suspect the end (of the panic, not the world) might be nigh. But tell that to emerging markets, which are submerging rapidly again today.

It's a decent bet that all this official guaranteeing will eventually ease the mutual mistrust of banks, funds and corporate borrowers and that the credit emergency will wind down, replaced by a long, hard recessionary slog. And just as the credit crisis festered out of sight until Lehman failed, the guess here is that it could abate without much notice.

The real tell will be when stocks start rallying for no obvious reason and in the face of dismal statistics and earnings forecasts. There will be plenty of both around soon enough to test the market's willingness to climb the famous wall of worry. For instance, September retail sales were awful, with apparel down 5.5% from a year ago, furniture off 13.3% and electronics and appliances down 13.8%, according to MasterCard. This should be confirmed this Thursday by the retailers themselves, and by whoever else chooses to follow in the footsteps of GE and BofA in preannouncing disappointing results.