Stock Market Insanity or Manipulation.

As measured by the Dow Jones Industrial Average and the S&P 500 index, the American stock market has dropped by over five per cent in the past eight days.

According to news stories, the reasons include bank regulation as proposed by President Obama, the possibility that Federal Reserve Chairman Ben Bernanke will not be confirmed for a second term in office, and an order to reduce or stop lending issued by the Chinese government to its nation's banks.

In a rational world, all of these would have a positive influence on the market: a safer banking system, that does not need so much taxpayer support, would materially improve the long term health of our economy while the Chinese government now seems to be aware - and is acting on its awareness - of the danger of an incipient asset price bubble. The possibility that the Bubblemeister's Apprentice (Bernanke who succeeded Bubblemeister Alan Greenspan at the Federal Reserve) will be removed, and the rising influence of former Federal Reserve Chair Paul Volcker, should hearten those who fear an uncontrolled inflation resulting from the grossly promiscuous creation of money in the recent past.

If the market was responding to the news, then insanity was afoot. On the other hand a different explanation makes the reaction look rational. Since stocks are over priced for current economic conditions, and a new bubble is clearly growing, speculators suddenly realized the truth - at least for a week - and began to sell like crazy while spreading lies and misinformation to disguise their motives.

Our nation, and perhaps much of the world, is on a narrow path between the economic equivalent of Scylla and Charybdis. The dangers are a rerun of the Great Depression or a Weimar Republic (Zimbabwean if you prefer) inflation. We can only hope that government - particularly the Congress and the Federal Reserve - can refrain from making things worse.

Beware the Wall Street shills, whose job it is to peddle mindless optimism, because it isn't going to be different this time.