My essay in Outside the Box last Monday seemed to ignite a lot of response in the blogosphere. My basic contention was that the Fed had to act to facilitate the sale of Bear to prevent a meltdown in the markets. Many agreed, but others said Bear should have been left to hang, pointing out that a thorough cleansing is what is needed. Others scoffed at the notion that allowing Bear to fail would have created a massive stock market sell-off. This week we will reexamine that concept, look at the drop in gold and commodities, come to the defense of Alan Greenspan (which should be food for a little more controversy), and think through to the end game of the economic crisis.

But first, a little housekeeping. There is now a Spanish version of www.johnmauldin.com. For those who care, you can click on the tab in the upper right. We hope to soon be able to offer the letter in Spanish, in addition to the current translation in Chinese.

Secondly, as we announced a few weeks ago, I am now working with my friend Steve Blumenthal and his team at CMG to offer a variety of investment managers who can work with investors with less than the $1.5 million needed to be classified as an accredited investor. I am proud of the managers we have on the platform. To see the managers and their returns, and how they are doing lately in this turmoil, just click on the following link and fill out the simple form. The minimum account size is $100,000. http://cmgfunds.net/public/mauldin_questionnaire.asp

"Our analysis leads us to believe that recovery is only sound if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own." -- Joseph Schumpeter

How do we interpret the words of Schumpeter? Is the Austrian School of Economics right? Should the Federal Reserve have allowed the US (and thus the world) to go into a deep recession in 2001-02? Did we just postpone a Day of Reckoning only to have one in the future which will be even worse? What about gold? We look at these questions and more as we continue looking at the "debate" between the gentleman from GaveKal and Bill Bonner and Addison Wiggin.

Is it different this time? Can it be that trade deficits do not matter? Or is our collective debt going to end in a period of financial crisis and tears? Is Alan Greenspan right when he says periods of low risk premiums end in woe for the participants?

For readers in the middle of this conversation, we are in a series on the debate held at a London restaurant between Charles and Louis-Vincent Gave (father and son) and Bill Bonner. The Gaves openly declared that "This time it's different," much to Bill's amusement. We all know that it almost never, ever is. They make their argument in a book called "Our Brave New World." I did part one of a review two weeks ago and will finish reviewing that book today.

Nearly all eyes are on the terrible devastation caused by Katrina, and rightly so. I can do little to add to the amount of news you already doubtlessly have, but in today's letter we will look at some of the economic implications from this tragedy, as well as how they fit into the larger picture of what is already unfolding, and specifically Federal Reserve policy. We will look at a lot of individual items up close, and then see if we can then step back and see if we can make some sense of them.

One of my favorite moments in Dallas Cowboy football was when Hall of Fame quarterback Roger (the Dodger) Staubach would come up to the line, see the problems in front of him, and call an audible. (For foreign readers, that means he changed the play at the last second, shouting out a code for a new play.) Let's see if I can make a case where Fed quarterback Greenspan needs to come to the next Fed meeting and call an audible.

What is the relationship between housing prices and stock market forecasting? What will happen if the housing market begins to falter? Exactly what did Greenspan say about housing at Jackson Hole? We explore these topics and a whole lot more and hopefully we can tie them all together by the end of this letter as we meditate on the potential risk of the recent housing boom.

Let's start with forecasting. Every few weeks I get a wonderful letter from good friend James Montier, who is the global equity strategist of Dresdner Kleinwort Wasserstein. James is an expert on behavioral psychology and investing. This week's letter is lamenting the rather poor track record of forecasting by economists and analysts.

It's a race to see what will be the cause, or maybe better put, what will be blamed for the next economic slowdown. Will it be oil and rising energy prices? What about a slowdown in the housing market? You can't count out the Fed raising interest rates as source of economic slowdown. If China slows down and thus has less money to invest in our bonds, will rates rise? There are so many potential culprits. We run through them and more as we try to peer into 2006.

One of my favorite cartoons is a picture of two scrawny vultures sitting on top of a cactus in the middle of the desert. One turns to the other and says, "Patience, hell. Let's go kill something." Patience is what we are going to need for the rest of this year.

This week we revisit our old friend, the Yield Curve. We look at what it may or may not be telling us, how the Conference Board has changed how they look at the yield curve as part of their leading economic indicators, and muse upon what Greenspan is really doing. There's lot of very important and interesting ground to cover, not the least of which is my concern about Fed policy.

But first, let me invite you to meet me in New Orleans at the New Orleans Investment Conference October 30-November 3. This is the grand-daddy of all investment conferences, and they always have a great line-up of speakers. This year Steve Forbes, Ann Coulter, Jim Rogers, Marc Faber, Dennis Gartman and for fun P. J. O'Rourke will be there, along with your humble analyst, as well as scores of great speakers. There is a great deal of emphasis upon gold and natural resources, as well as other types of investments.

"There is little doubt that, with the breakup of the Soviet Union and the integration of China and India into the global trading market, more of the world's productive capacity is being tapped to satisfy global demands for goods and services. Concurrently, greater integration of financial markets has meant that a larger share of the world's pool of savings is being deployed in cross- border financing of investment. The favorable inflation performance across a broad range of countries resulting from enlarged global goods, services and financial capacity has doubtless contributed to expectations of lower inflation in the years ahead and lower inflation risk premiums. But none of this is new and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience." Alan Greenspan, before Congress, February 16, 2005, (my emphasis)

Be careful what you ask for, the ancient wisdom says, because you just might get it. The world markets are asking for a return to balance, where the US trade deficit shrinks, the US saves more and we balance our government budget. All laudable goals, and ones I would applaud. But the road to a balanced global market may not seem like a walk in an economic Lake Woebegone, where stock market returns are strong, stagflation does not darken the path and where all our portfolios have above average returns.

Having had the luxury this week to read more than my usual mountain of material, I am struck by the sheer complexity of the world economy. It is a puzzle with seemingly obvious answers yet exceedingly difficult to solve; or a riddle with many answers, none of which are exactly right; or maybe it is more like a great mystery, where there are clues on every page, but it is only when we come to the end that we can recognize that we had been given a clue.

This week we re-visit Federal Reserve policy, and how their current policy may be setting up a very real problem with interest rates. Is the dollar getting ready to make its next move down? We do live in interesting times.

Yesterday I had long telephone conversations with both Jim Bianco and Greg Weldon, talking about Federal Reserve policy, interest rates and the dollar. There was an apparent disagreement on some concepts between them. Last night I did some meditating on those discussions, and decided a summary of them would give us an excellent starting point for this week's letter. Because they may both be right, and that may not be a good thing