Look out below II

I see some people are now talking about the DOW falling below 8,000 in the near-term. That would be something like a 45% drop from its high around 14,000. It's happened before. It can happen again. With the large bond insurers like MBIA failing, there will be another huge round of write-downs at the big banks since the insured bonds they hold will have to be written down. Many of those banks are short of capital already. With their capital base gone, they won't be able to continue lending. (By the way, this has nothing or nearly nothing to do with cash flow or liquidity per se. It has to do with solvency.) Without lending, businesses and individuals will have to sharply tighten their belts. Tightening the belts means a cut back on consumption and investment spending. With the economy falling, the tax base will shrivel as well, probably forcing a sharp cut back in government spending (at least at the state and local level). Well, just remember that GDP is roughly equal to the sum of consumption plus investment plus government spending. With all three contracting ... whooops there goes another rubber tree plant.

I'd say it's time to hunker down for the long haul.