After almost two decades, we are retiring Downside. The site will remain up as a record of the first dot-com boom and bust. Thank you for all the years of attention.

Much of what we've written here was once radical, and is now conventional wisdom. As we pointed out last September, we predicted all this years ago.

We predicted the mortgage crisis in October 2004, again in 2006, again in 2007, and said it was here in March 2008. It was obvious from the fundamentals that houses were overpriced and a collapse had to come. The Fed's rate cuts delayed the inevitable for a few years, and kept the bubble expanding. When the collapse came, it was worse than expected.

We predicted auto company bankruptcies in 2006. We predicted the oil spike in 2005. We predicted the dot-com collapse in 2000. Our track record is on these pages. Sometimes we were a bit early. But everything we said would go bust, did.

The future is now in the hands of political forces. We can't predict that from fundamentals. So we have no further predictions at this time.

Somewhere in Manhattan, forensic accountants are working through the holidays, trying to unravel Bernie Madoff's $50 billion Ponzi scheme. To them, we wish Happy Holidays.

The first books on the current crisis are starting to appear. We recommend these:

• The Origin of Financial Crises (Cooper) What went wrong with policy.
• Essays on the Great Depression (Bernanke) Yes, that Bernanke.
• Depression Economics (Krugman) Light reading

Cooper's thinking is close to our own. Krugman is focused on Japan's bubble of the 1980s. Bernanke, it turns out, is a student of the first great depression.

This isn't 1929. That was an equity crash. This is a debt crash. The closest historical analogy in US financial history is the Panic of 1873, which offers little guidance for what happens next.The collapse of Japan's real estate bubble after 1989 is the closest modern analogy. Japan's markets did not recover for a generation. We can expect a similarly long recovery.

The recovery will not be controlled by the US Government. It's in the hands of the US's creditors, notably China. China Daily has outlined the political price of financial support.

The current draft of the "Emergency Economic Stabilization Act of 2008" is worth a close read. A few notes:

• The Secretary of the Treasury is empowered to purchase "troubled assets" from any financial institution.
• The Treasury's new "Office of Financial Stability" does the buying. A new assistant secretary of the Treasury runs that office, and has to be confirmed by the Senate. That's the new "bailout czar".
• The insurance program requested by conservative Republicans is provided for. Premiums are to be sufficient to support the program.
• There's oversight, including reports of all transactions to Congress. "To facilitate market transparency, the Secretary shall make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase, trade, or other disposition." We look forward to seeing those transaction journals.
• There's a "foreclosure mitigation" scheme.
• Initial borrowing authority is for $250 billion. This can be extended to $350 billion on Presidential request, and to $700 billion with Congressional consent.
• The SEC gets rather broad authority to suspend "mark-to-market" accounting. Probably a bad move; a similar provision kept dead Japanese banks semi-alive for over a decade.
• Salaries above $500,000 per year are not tax-deductable for bailed-out financial institutions. That number somehow crept up from $400,000.

The administration's proposed bailout plan is disappointing, but not atypical. No oversight. No accountability. No plan. And very expensive.

First, based on the administration's track record, which started with an economic adviser from Enron and went downhill from there, the money would be spent badly. The dollar amounts are too big this time to allow that.

Second, as we've been pointing out for years, we had a housing bubble, and it must deflate. Historically, the median house sells for about 2.5 to 2.8 times the median income. In the last few years, the national ratio peaked around 4, and in some markets, reached 10. That number is dropping, and it's going to drop until the historical ratio is restored. The "wealth effect", the idea that it was normal for house prices to increase forever, misrepresented inflation as growth. Trying to restore that state of affairs with taxpayer money is both a major public policy mistake and doomed to failure.

All bubbles collapse, and when they collapse, they collapse all the way. Reread "Extraordinary Popular Delusions and the Madness of Crowds". Trying to stop a bubble collapse is an expensive exercise in futility

Japan went through this. Their real estate market peaked in the late 1980s, and when the bubble collapsed, Tokyo residential real estate declined 90%. It wasn't the end of the world. Now houses in Tokyo are affordable again.

Where would the money come from? Higher taxes? Runaway inflation? A World Bank-type intervention in the US economy? Just paying the interest will be a huge load on the economy. The Government won't be able to borrow that money at 2%. Some of my friends are already dumping US paper and buying CHF and EUR denominated bonds.

We may have to take the collapse and then clean up the mess with Depression-type measures and strict regulation. We need to let the "creative destruction" part of capitalism do its job on the financial community. When the dust settles, the US will have a much smaller financial community, and it will be a service function for the more useful parts of the economy.

At one point, 40% of US corporate profits were coming from financial activities. That couldn't last; financial activities are an operating cost, not a productive output. Before 1992, there were no credit derivatives. It's now clear that the whole concept of trying to offload credit risk in this way is a failure. It has to go. Removing the Depression-era restrictions on financial institutions, like Glass-Steagall and the restrictions on branch banking, was, in hindsight, a big mistake. Giant integrated financial institutions aren't more stable; they just fail more spectacularly.

We need something like the Resolution Trust Corporation again; something that holds a limited class of assets to be worked out or sold off. We may need more federal funds to prop up the FDIC. But that's all. That's where Government intervention must stop. We can't afford to throw good money after bad trying to prop up failed financial institutions.

"Too big to fail" is over. We've reached "too big to rescue".

Downside has not been updated in several weeks, due to the decision by our hosting provider to exit the web hosting business. Downside is now back up, and the databases are being updated regularly at 4 AM as usual.

We will have more to say about the current financial collapse shortly.

WASHINGTON -- Amid heightened concerns over the state of the world financial system, U.S. President George W. Bush gave assurances Monday that capital markets are working smoothly, adding that the U.S. is "on top of the situation."

"One thing is for certain, we're in challenging times," Mr. Bush told reporters after meeting with his top economic aides. "But another thing is for certain -- that we've taken strong and decisive action.

"The United States is on top of the situation," Mr. Bush said.

Now there's a sell signal.

At the beginning of 2006, our predictions included this: "US interest rate spike. "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market."

We were right about the housing price crash. It came a year later than we expected, but it's definitely here now. There's no sign of an interest rate spike yet, because the Fed is desperately intervening to keep rates down. That's producing inflation and negative real yields. Unclear how that unwinds; politics drives enconomics in this area.

Judged by commodity prices or exchange rates, the US is now experiencing inflation at Third World levels.