The real story today is the Bond Market, although you won't hear that too loudly on Bubble TV.

The last few days have seen a rather nasty move in the yield curve - flattening. But last night Bernanke's speech, in which he noted that inflation expectations were at risk, hammered the curve at a time the pits were closed and the electronic reaction was instantaneous - and nasty.

One of the most common trades of late among the bond folks has been a "steepening" trade - that is, to be long 2 year bonds and short 10s or 30s. As the yield on the latter rises and the former falls, the price moves the other way - so the short end price goes up, and the long end price goes down.

Now gear this up at 20:1 and wow! Excellent!

Until it reverses, at which point you need to bend over and grab your ankles.

Oops.

Speaking of "inflation expectations" it never ceases to amaze me that the the truth is right there in front of people, but they refuse to read it. The most striking example is how Bernanke (and Greenspan before him) always talks not about inflation itself, but about inflation expectations.

In other words, he's telling you that he really doesn't give a good damn about what really happens to prices - so long as you believe he can keep them under control in the future!

Oh, the check is in the mail, I would never lie to you about the mileage on this car, and I won't (censored.)

Actions speak louder than words Ben. You and the rest of the Fed Governors have flapped your jaw a lot of late talking about how you think your policies will promote "moderate growth and lower inflation over the medium term." Uh huh. Nice try. Your "lower inflation over time" has taken gasoline prices from $2 - $4 in less than two years, doubled the price of many foods, and ramped industrial and import costs.

Such a fantastic record you have there Ben.

Why has this happened? Because, as I've noted before, Ben and his buds have sat back and watched the most outrageous instance of counterfeiting ever known to mankind.

Let me elaborate a bit.

When someone speaks of counterfeiting you usually think of someone who stole a set of currency plates and "secret paper", and is printing himself a stack of Benjamins.

But in fact we live in a credit-based society. And herein lies the problem, because a credit dollar spends just as fast as does a printed one. In fact, they are indistinguishable to both the person spending them and the person accepting them at the time of purchase.

Now later on the person who spends a credit dollar sees a big difference, because that credit dollar must be repaid with interest. And therein lies the problem, because in the end if you can't make those payments you go bust, and if enough people can't make the payments the person who made the loans goes bust too!

But how did that credit dollar get counterfeited?

Its really quite simple - all I have to do is misrepresent the risk in loaning you money.

See, in truth there is really only "X" worth of "money" in a financial deal, and all of these prices are in fact referenced off Treasuries, because the United States Government is fancied as a "risk free" place to loan your money - that is, they will always pay you back.

So let's say that your actual risk of not paying is, after careful consideration, 300 basis points (or 3%) higher than a Treasury of the same duration. For the sake of argument we'll say you want to borrow for 30 years - a common mortgage period.

So if the 30 year bond is currently trading at 4.5%, and your true risk of nonpayment is 300 basis points higher, then you should pay 7.5% plus whatever profit the person who loaned you the money needs to make to stay in business.

But what if I can figure out some way to convince the lender that I only have a risk of 200 basis points over Treasuries? I can then make an extra 1%!

But in fact did I "make" anything?

NO!

I stole it because the true risk is in fact 300 basis points!

That, at the core, is what has happened in this credit and housing boom, and it is why we're in serious trouble in this country.

Yet this fact - that in fact the entire "bubble" has been fed and created by theft and fraud, not by "honest mistakes", has been totally ignored by the media, by Bernanke, and by Congress!

One of the more egregious examples is the "seller down payment assistance" programs that FHA tried to kill and failed. They're making a second attempt, but the "not-for-profits" (and others) who are involved in this industry are pushing back hard.

Never mind that the effect of this counterfeiting - that is, materially understating risks - has now been proven, as the FHA reports that these loans default at a rate three times higher than those without seller-financed down-payment assistance.

Now this game has been extended beyond Main Street and into Wall Street playing their leverage games:

"There's a new feeling in the Wall Street air: The big firms are now too big to fail. If the chaos that might ensue from Bear Stearns going bankrupt, and stiffing its counterparties on its billions of dollars of trades, is too much for the world to endure, the chaos that might be caused by Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. or Merrill Lynch & Co. or Morgan Stanley going bankrupt must also be too much to endure.

Already we may have seen one of the pleasant effects of this financial order: the continued survival of Lehman. What happened to Bear Stearns might well already have happened to Lehman. Any firm that uses each $1 of its capital to finance $31 of risky bets is at the mercy of public opinion."

Right.

But if the risk these folks take and pass on is mispriced, then "we the people" are not backstopping "bad results" - we are in fact backstopping counterfeiting, just as certainly as if we shipped plates and paper to these investment banks!

We the people need to start calling this mess what it in fact is - counterfeiting - and demand that our elected and unelected representatives put a stop to it across the board.