Over the last several weeks, the market turmoil has been acutely painful. I don’t say that because I merely lost 10% of my retirement portfolio (invested in index funds by the way), but because we’ve seen another example of an asset bubble popping… and the hissing sound can be heard around the world.

While I was thinking of opining in detail about the Bernanke Fed’s move to cut the discount rate, I’ll give it a cursory mention and then discuss asset bubbles in broader terms and what it means for us today (I’ve discussed asset bubbles before). The cut in the discount rate was merely a signal for the market. One, the discount window is rarely used. Two, if some bank were to use it, that would signal the beginning of the end. Why, you ask? Because the bank that shows his sorry face to the teller, couldn’t raise money from any additional source and had to rely on “government” funding. If the company were public, the markets would pummel the stock, choking it from additional funding. If the company were private (or even public come to think about it), you could expect a run on the bank, effectively causing the bank to declare insolvency.

So let’s assume that no one will be using the discount window. Contrary to this article by Bloomberg, I still believe that Bernanke executed at the perfect time (the day that the Nikkei dropped by over 5%), and allowed himself and the FOMC time to analyze the coming market events and eventually take the next step by lowering the actual Fed Funds rate (adjustible rate mortgage holders rejoice!). I still believe that the Fed is going to need to take aggressive action to counteract the negative effects the housing bubble is having on the economy. Look for significant rate cuts in the near term. In the long term, Bernanke’s focus will move back to inflationary caution and rates will continue to rise (but only once housing has stabilized).

On to asset bubbles and the havoc that they wreak. As you’re well aware from my previous postings, I believe that bubbles are problems in the short term. In the long term, the infrastructure that was needed for an ever-growing and expanding economy has been created, and the American public is able to take advantage of it. For instance, where do you think all the illegal immigrants that have entered the country will live? Mostly in urban areas. Where does the population expand? Into the homes that Beazer, Pulte, etc… built. The infrastructure will be used in due time. Just not as fast as anyone hoped.

This leads me to… Technology bubble, Housing bubble, Economic Bubble?

It’s no secret that with the excess capital and liquidity sloshing around the world these days, we’re more prone to bubbles as capital moves swiftly from country to country. China is certainly in the midst of one, and the end of it won’t be pretty. The question I’d like to pose may sound strange, but certainly keeps me up at night. Are we in the midst of an economic bubble? An era where new ventures and businesses are funded and kept operational because there is no better place to put excess capital? That would have some broad effects on the economy.

Chilling.

That’s my thought for now. Let’s see where it goes…