“Fear rules credit markets,” Bloomberg quotes a source at Goldman.

“Corporate loan market is reeling,” adds the Wall Street Journal . The WSJ does not mean ‘reeling’ in the sense of the Virginia reel...or of a Scottish reel...but reeling like a boxer who has just been hit by a haymaker.

In the battle between greed and fear – the latter seems to be landing the hard punches. Deflation is winning – not inflation...Mr. Market – not the market manipulators. Bust, not boom.

But let us back up to where we left off yesterday.

Were you paying attention, dear reader? We hope so.

Yesterday, we noted that Americans had misunderstood what capitalism is. It is not a system that makes people rich. It is only a context, in which people CAN get rich, if they do the right thing. It is a moral context, in which virtue is rewarded and error is punished. Given misleading signals by their financial authorities, Americans made a big error – they spent too much and saved too little. Now they are being punished for it, even while the feds tell them that they were doing the right thing all along...and that they’re going to get more money and credit so they can continue doing it.

But nature – whom capitalism allows to express herself – will have her way. Nature wants to correct the errors of the past five years, at least. Maybe she wants to correct the errors of the last 25 years...we don’t know. But she’s got a switch in her hand, and we’re staying out of her way!

Yesterday, the Dow went down a further 65 points. Even great companies, with unbeatable brands are going down. Harley Davidson, for example, is off more than 20%.

And now, it appears to us that Americans are learning their lesson. They are finally downsizing...cutting back...making do. Soon, we predict, we will read that they are saving more money. ‘Thrift’ will make a come back.

“More homeowners walking away,” says CNNMoney .

There’s even a website to help them – walkaway.com. It tells homeowners how to walk from their mortgages, but stay in their houses. That’s right, it tells them that they can live in their houses for ‘up to 8 months’ without paying their mortgages...and after announcing to their mortgage holder that they have no intention of making any further payments.

Nice deal for them. But not nice for the lenders. That’s why there’s so much fear in the credit market. They’re afraid they may never see their money again. By they time they get the family out of the house and put it on the market, for example, the house price could be well below the loan amount.

Even at the top end, house prices are getting softer and softer. Forbes reports that Hollywood celebrity Ed McMahon has cut the price of his Beverly Hills house three times, from the $7.7 million he asked in July ’06 down to $5.7 million today. Guns ‘N’ Roses guitarist Slash bought his house in Hollywood Hills for $6.2 million; he sold it last month for $5.8 million.

Toll Bros. announced its seventh straight drop in quarterly income.

And analysts are saying that the coming recession (maybe it is already here) will be “worse than recent downturns.”

It will be a “Year of Reckoning,” says a Wall Street Journal headline. Hey wait, that’s our line!

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.