But commonsense did not prevail. Instead, corporations began to borrow money heavily from the banks (e.g. Citibank) to keep their stock buyback spree going.

The big banks were extremely unwise in making such non-productive loans, and that is why we now have the worse financial crisis since the Great Depression.

Now we have the following situation:

• Banks are forced to cut leverage and will have far, far less money, if any, to finance buybacks for many years.
• Corporations are now caught in a debt squeeze, having squandered wealth earned in the good years, forcing the buyback play to extreme limits.
• Radical leftists are now in control of Congress and the Presidency and fat executive remuneration is no longer in fashion. The people who were playing the buyback game are now trying to hang on to their jobs as long as possible.
• The Baby Boomers are moving into their Golden Years and out of equities (what they have left) into bonds and income securities. The Common Stock Legend is virtually dead.
• Pension funds and insurance companies are under extreme pressure as stock prices reach for the bottom. Institutional investors will not favor stocks for a long, long time.

So, it seems that now we have reached the final blow-out that should have occurred in 2000. Only the consequences now will be far worse.

The facts are simple:

• Since the early 1980s, the principal buyers of equities were mutual funds (the common stock legend) and corporations (buybacks to feed stock options). Both of these sources of funds have now dried up and are likely to stay very dry for a long time.

• Companies will now have to SELL stocks to raise capital and avoid bankruptcy. Banks are de-leveraging. Asset backed securities are no longer in demand.

It looks to me like we will go back to the 1960s, when instead of the equity market consisting of corporations buying stocks to support executive stock options, they will be selling stock to raise capital.

Investors, no longer believing in the Common Stock Legend, will probably go back to practices of their great-great grandfathers, buying stocks on the basis of dividend yields — which, in those days meant yields about 115% of the yields of bonds of the same issuers. Unfortunately, companies are now cutting dividends, which means that investors will turn away for a long time.

This suggests that stocks are nowhere near the bottom yet.

On top of all this bad news, we have the Obama administration spending money that there is only one way to pay back — inflation. The United States won’t go “bankrupt”. It will simply do what countries have always done when they borrow more than they can repay — the US will debase the currency.

What this means is that interest rates will soar (because of inflation), stocks will plunge even more, and the only “winners” will be those holding debt and hard assets (like real estate).

History shows that the favorite way for a country to pay off debt is to devalue the currency through inflation.

I lived through many years of high inflation in Brazil and it is not the end of the world, if you know what you’re doing. Some people, who understand the process, get very rich during inflation. So think positive.

By the way, even if Obama is a one-term president, the damage that he will do in four years is likely to be so extreme that it will take at least a decade to recover.