Since September, Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry “Hank” Paulson have been trying desperately to prevent a global economic meltdown. Can their efforts actually work or is the crisis inevitable?

After great discussion amongst our group of economists in New York, London, Paris, Frankfurt and Tokyo, the general sentiment is in the negative. Our team believe this crisis has yet to reach its bottom, and until it does, the efforts made by Messr’s Bernanke and Paulson are simply plugging up minor holes, while the crack in the dam is spreading.

That fundamental crack indicates to us that the system is destabilized at its core, the faith and trust in the systems that comprise the economic fabric. We believe the system is damaged by lack of confidence and trust at this stage that bailing out the individual components will hardly result in a cure.

While it is critical to provide jobs and to keep industries functional in order to maintain the employment base and hopefully increase it, we believe there is an inevitable crash yet to occur that in fact must occur in order for a cure to be possible.

With massive deleveraging taking place since September, it is abundantly clear to us that the valuations of everything from real estate to product inventories are dropping, making it continually impossible for banks to generate loans, while coincidentally putting so great a fear in the mind of the public, including business management, that adding debt today would cause further difficulties.

Our team of economists and financial markets experts, in a conference call this morning, expressed their opinion that the stop gap efforts being made by government in the US, while commendable, will not prevent the requisite crash in order for the system to accept any future cures. Their recommendation was to allow the system to do its worst, come to its bottom, and then put new systems of checks and balances in place. They were confident that until this occurs, every effort made will only result in a concomitant consequence in another area. General sentiment was that every solution presented to resolve one or two portions of the crisis only yields new problematic areas and bad news perpetuating the crisis, rather than allowing it to take its natural curve.

The belief remains that a crash will occur some time in Q1 of 2009, and that the present economic depression will last between 18 and 24 months, provided no more massive job losses take place and government acts to resolve issues with bankruptcy and credit reporting laws that are anticipated to perpetuate the crisis.

In regards to lending, here the fundamental problem still remains the loan origination and verification process, with nothing being done either by the industry or by the government to create a checks and balances system and protect the borrowers, banks and investors from predatory lending and the problematic relationships between banks and mortgage brokers.

Keeping in mind that a few major recent defaults in Commercial Mortgage Backed Securities for hotel projects indicate a likely crisis in CMBS moving forward that could have equal, if not greater impact than sub-prime, we, as economists believe the crisis is far from over.

Some on Capitol Hill too, believe the efforts to resolve this crisis are far from sufficient and that only a natural solution, simply letting the bottom be reached without interference, will resolve the crisis.

When all is said and done, the meteoric rise in property values and subsequent deleveraging result in what will still be a banner decade for property values, even with the bursting of the excessively inflated pricing bubble. Many economists are concerned about commercial valuations, which remain too high, and problematic for banks trying to originate loans for commercial property moving forward. How does a bank properly appraise the value of property that is expected to drop? Can they discount 40% or more in a lending application? Can they influence appraisers to come in low so that inflated commercial valuations are discounted from the loan appraisal? Or would that be undue, illegal influence? Therein lies part of the commercial lending dilemma, and one major reason why banks are still not making substantive loans in this sector.

With the natural solution, a market crash, all these issues would resolve of their own accord, allowing banks to resume lending once more and permitting the markets to start to recover slowly. 

You're asking why Paulson and Bernanke are making this effort to stave off the crash? For totally different reasons. For Bernanke, as an academician with expertise in market crashes, he wants to prove one can be prevented, while for Paulson, his goal is to prevent the worst crash in 100 years from happening on President Bush's watch, the theory being that he's protecting the historic legacy of the outgoing President.

Analysts believe these reasons won't, in the long run, hold true. Bernanke will still have to cope with the crash when it occurs, even if its a softened crash thanks to his exceptional leadership, while Paulson's efforts may push the crash off to the Obama presidncy, but Mr. Bush will still be blamed for the crisis that leads to such a crash. The view history will take of Mr. Bush will not be a favorable one, whether the crash happens now or later.

While we do not advocate market crashes, we concurrently do not advocate excessive market intervention to prevent the natural flow of market forces. At some point, a bottom must be reached and to date, we’re not there… yet.