How do you know when you're through the looking glass? A fairly good indication is when the price of gold, which normally moves up in response to monetary easing, instead plummets in reaction to one of the largest rate cuts in Fed history. Apparently, yesterday's 6% drop in gold resulted from the "hawkishness" shown by the Fed in only cutting rates by 75 basis points, rather than the 100 points that many had expected. It is a testament to how low the bar has been set that the Fed can slash rates in the face of a collapsing dollar and soaring commodity prices and still be viewed as hawkish on inflation. Is it just me, or is Ben Bernanke morphing into the Mad Hatter?

Despite the mildly tough language in its statement, it should be clear to all that the Fed sees inflation as the only politically acceptable "solution" to the problems it created. The conclusion that a 75 point cut shows concern about inflation is half right. The Fed is concerned, but only to the extent that the markets stay focused on bogus CPI numbers and fail to notice severe price increases throughout the economy. The fact is that inflation will be with us for some time, and the knee jerk drop in gold is yet another excellent buying opportunity.

As the credit and financial crisis spirals out of control, and the Fed moved $30 billion of garbage Bear Stearns debt onto the public balance sheet, the proposals coming from other market leaders are taking similarly phantasmagorical turns. Steve Forbes, in an interview on CNBC earlier in the week, proposed that the government suspend "mark-to-market" rules for one year so that holders of unsellable mortgage-backed securities no longer have to recognize losses. Remember, the dominos began to fall precisely when two Bear Stearns hedge funds were forced to actually sell assets they had failed to properly mark-to-market. Were the government to actually follow this advice it would destroy what little confidence remains in our financial system. However, Mr. Forbes believes that the markets can be spared unnecessary pain if participants can simply pretend that their holdings are worth par value. This amounts to a plea for accounting by mutually beneficial mass delusion.

Later in the week, investors were cheered by the Government's decision to slash the surplus capital requirement of already overextended Fannie Mae and Freddie Mac by 33%, and by Wall Street's success in convincing investors to dump $17.9 billion into the record IPO of Visa...which may qualify as the largest sucker bet in history. But the most bizarre idea was introduced on the pages of the Wall Street Journal when veteran opinion page writer Holman Jenkins Jr. recommended that the government buy and "bulldoze" foreclosed homes in order to prop up the values of those that remain standing. I'll deal with these ideas in sequence.

After pushing through earlier proposals that allow and encourage Fannie and Freddie to buy larger loans, the reduction of capital requirements now pushes the government sponsored lenders farther out on a leveraged limb. By allowing the accumulation of even more taxpayer guaranteed debt, the moves will merely delay and exacerbate the housing problems and will increase the size of losses when these two government sponsored enterprises ultimately fail. In the meantime, by taking on more risk, the appeal of existing Fannie and Freddie insured debt will erode further, driving up mortgage costs, and creating additional losses for leveraged owners of these securities.

In the early stages of the biggest credit crunch in U.S. history, buying shares in Visa, a company that derives its revenues based on transaction fees from credit card purchases, qualifies as a particularly ill- timed investment. Perhaps buyers of these shares didn't get the memo, but the days of Americans using credit cards to buy products they cannot afford are about to come to an end. For all its flaws, Wall Street does possess an extraordinary ability to apply lipstick on any pig. For the formerly private owners of Visa, this is perhaps one the best exit strategies ever engineered, on par with the Hail Mary orchestrated by Blackstone last year (shares of Blackstone are now trading for half their IPO price).

Finally, in response to Mr. Jenkins' proposals, there is no question that we built far too many homes during the housing bubble. However, destroying them now will merely compound our losses. The one benefit we have from excess construction is an ample supply of what will soon be highly affordable homes. At the moment foreclosed houses are only unwanted because their prices are still too high. Once prices drop sufficiently there will be plenty of demand. However, destroying existing homes reduces their value to zero (actually less due to demolition costs) and only exacerbates the losses to creditors and society. Mr. Jenkins' thinking is formed by the same perverse logic that led the Roosevelt Administration to destroy farm animals and crops during the 1930's because he wanted to prop up food prices. As I wrote in my book "Crash Proof", we must certainly be on the eve of our financial destruction, as we are clearly a nation gone completely mad.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse."