"There have now been 3 hair-raising instances in the past 20 years when the capital markets broke down badly enough to cause commercial and investment banks alike to stare into the abyss of total collapse. In each case, the stock market fell after hitting recent new highs and the Fed came riding to the rescue. 

Here are those periods, the amount of the decline in the S&P off the highs, and how many days after those highs were seen for the Fed to take action:

• October, 1987; decline of 40% off August highs;
Fed eased less than 60 days after the top

• September, 1998; decline of 20% off July highs;
Fed eased less than 60 days after the top

• August, 2007; decline of 10% off July highs;
Fed eased less than 30 days after the top on July 19   

** I've excluded September 11, 2001; the fear was of a different nature and Fed was already easing**

Notice any pattern developing? Yes, the times are shortening between stock market tops and the first Fed ease. And, yes, the amount of decline in the S&P before the Fed pulled the trigger has dropped significantly, from -40% in 1987 to a mere -10% today.

Why would the Fed see fit to ease so shortly (less than a month!) after an all time high in the S&P? Saying it's simply Ben Bernanke's "helicopter" mentality is as unfair as it is facile.

Part of the explanation is that the equity crowd is the biggest beneficiary of a credit bubble, and that they are the last in the room to understand why its unwinding matters to them. The more important reason has to do with the rise of securitization's role in the capital markets.

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Good stuff. Thanks, Jack.