After a well needed break, the KoolAidMan is back! During the time off, he’s been disconnected from the markets and the media, however upon returning it seems that not much has changed. Housing values haven’t rebounded yet, and the markets are still jittery.

Instead of linking to a top story about home values dropping again, we found a nice piece at Marketwatch reminding us of some old expressions that are very applicable to the realtors, home buyers, sellers, and lenders who sparked this mess that we’re in.

What goes up must come down. One reason people did this is that home prices were rising faster than personal incomes for a number of years, but that could not go on forever, as we know now.

We know now, and we could have known this back when the mania was at its prime. Most people involved chose to ignore reality and decided to speculate instead. We’re going to guess that there’s a handful of people who knew this and were able to cash out while they could, but there are millions of handfuls of people who are left holding the bag right now.

You can’t make a silk purse from a sow’s ear (or kiss a frog and turn it into a prince). These securities were based on loans of questionable quality that, when bundled together, somehow were blessed with AAA ratings by the debt-rating agencies.

There is no such thing as a free lunch. It boggles the mind how many money managers, investors and just about everyone else thought these securities could be rated almost as high as supersafe U.S. Treasurys — without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgage-backed issues.

We’ll be listening for any news on investigations into the ratings agencies as this mess unfolds. It’s difficult to predict what will happen because there are so many things going on behind the scenes that average Joe Investor doesn’t know, but we’re not in the game of making predictions here. We’d rather drink our Kool-Aid and believe that everything is OK!

Stay tuned, for later this week we’ll be covering holiday retail sales and consumer spending. We’re sure to see some interesting statistics in the coming days!

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The United States may or may not be on the brink of a recession, but one thing that’s certain is that our economy is starting to slow down. There are several causes, however most of the blame lies with problems with easy credit that were fueled by historically low interest rates.

CNN (and every other media source) is reporting that the Federal Reserve lowered its forecast for economic growth in 2008, with the markets responding by betting on a rate cut in December.

… in a new economic outlook, the central bank also lowered its growth target for the economy in 2008, raising hopes that the Fed will cut rates again when it meets in December.

In its forecast, the Fed cited “tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices” as the main reason for revising its projections downward.

Let’s try to solve the problem by doing the exact thing that caused it and lower interest rates again! Maybe with lower rates, subprime borrowers who can’t get loans right now will be able to get back into the housing market.

Let’s hope the Federal Reserve has a good understanding of the scale of the problems we’re dealing with. Is it worth saving the economy from recession at the expense of an increasingly devalued dollar and higher inflation? Deflation is also a risk

Eventually the American consumer (and the American economy) has to pay, either now or later. Which will be less painful?

Lower interest rates will devalue the US dollar even more than it already is and will almost certainly lead to more inflation.

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Shareholders in the securities industry are having the worst year since 2002, however Wall Street is paying a record $38 Billion in bonuses this year.

Goldman’s record earnings and gains at Morgan Stanley and Lehman mean all the New York-based firms will be forced to pay more in a year when all but Goldman lost more than 20 percent of their market value, said Charles Geisst, finance professor at Manhattan College in Riverdale, New York.

The industry’s bonuses are larger than the gross domestic products of Sri Lanka, Lebanon or Bulgaria. The average $201,500 bonus is more than four times the $48,201 median household income in the U.S. last year, according to U.S. Census Bureau statistics.

Is this fair? As long as the boards or the companies’ shareholders don’t complain. Those big bonuses may just be fair compensation for the hard work and long hours that anyone involved in the financial industry puts in.

The size of the payouts is a concern given how badly the shares of most securities firms have performed this year, said Fitzpatrick of Johnson Asset Management.

“They’re paid very handsomely in good times because they’re supposed to take a hit in bad times,” Fitzpatrick said. “Performance has dwindled this year, and I think they should feel that.”

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This was reported on CNN yesterday, but it’s worth mentioning here. There has been a recent trend of Wall Street firms increasing their exposure to hard-to-value assets, such as those backed by mortgages, which raises concerns about the accuracy of their balance sheets.

It might sound like an increase in assets is a positive thing for a bank. But no financial institution wants to record a big increase in illiquid assets, because pricing and selling them is difficult and, if the credit crunch persists, many of them could be a source of large losses in coming quarters.

To get a better grip on how level three assets might affect a bank, it makes sense to look at what exactly makes up level three assets, though this can be hard because of banks’ limited disclosure. In the case of Merrill, for example, we know that a sizable share of level three assets are distressed mortgages and CDOs, which are likely to be subject to further losses in the fourth quarter.

In defense of the banks, not all of these assets are backed by CDOs and subprime mortgages. Some of them are invested heavily in leveraged loans.

But even a well-resourced auditor can’t be expected to properly scrutinize the huge amount of level two and three assets sitting on banks’ balance sheets. For the seven banks Fortune surveyed, level three assets totaled over $430 billion, equivalent to 110% of the banks’ combined equity. That number will likely increase in the fourth quarter, making bank balance sheets even harder to read. Yes, that’s right: Wall Street’s black hole is getting bigger.

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