The stock market of the roaring 20’s was built on excess credit, leading many people to own stock that probably should not have and causing the intellects of the day to rationalize that we were in a “permanently high plateau”; the old ‘this time it is different’ routine.

Fabulously successful investor Bernard Baruch famously sold his stocks after getting a stock tip from a shoe shine boy on the way to his office. Remember the day traders during the high tech stock bubble. One friend noted his baby sitter was a day trader. On a train trip a conductor was giving me unsolicited tips on mutual funds. One of my truck drivers wanted a biotech fund option in his 401k. “Over my dead body” was my response.

The housing bubble that is imploding now was also built on easy (I would prefer ‘foolish’) credit and easy money from the Fed. Like the old depression there were plenty of academics and smart people contending that housing could not go down, and that ‘this time it was different.’

I saw on 60 Minutes a story about an acupuncture shop owner in Miami who had speculated and owned 5 condos in the city. Another shoe shine boy.

The difference is that this time the government is jumping in with all four feet and flooding the market with liquidity. Once we clear the horizon of fear, this money will find a home in the economy.

Yet there is also a fear that the shear volume of the Federal commitments will leave a deficit so high that we will have to inflate dangerously to pay it off.

To find a balance between ‘responsible stimulation’ without returning to the Great Inflation the Federal Government will have to cut expenses drastically. Given the Democratic control of DC they will have to reconsider destructively expensive global warming initiatives, health care legislation, tax cuts for the majority and tax increases for the rich (those that still are after a 40% drop in the market and the antics of Bernie Madoff).

Obama will be entering a period where we will likely experience short term pain for long term gain. Perhaps he is the best to do this given his popularity with the press.

But the current spend and bailout is an effort to inject short term gain that will lead to long term pain….. if the government can not make hard choices and nimbly adjust its position after a turnaround.