Thank god for laser eye surgery! Now, the people who were blind to the biggest financial crisis in the history of the world can see clearly again. And what do they see? A recovery!

“Bernanke strikes note of hope on economy,” says the headline in today’s International Herald Tribune.

“The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday that the US economy appeared to be stabilizing on many fronts and that a recovery was likely to begin this year.”

Is this good news? Or what? ‘Or what’ is our bet.

Yesterday, the markets seemed to take a breather. Stocks fell slightly. Oil slipped a bit too. The dollar remained where it was…but still on a downward trend. And gold held steady…at $902 an ounce.

Can the feds now fix the trouble they never saw coming? Can the people who ran banks into the ground now run the banks that will help finance the recovery? Can the investors who bought trashy investments with borrowed money now recognize the good investments that are put in front of them?

Neither Ben Bernanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see it – but there was something clearly wrong with the Bubble Economy of 2001-2007. We said so many times.

‘Good riddance,’ we celebrated, when it keeled over

But now they struggle to revive it. Like a brain-dead codger on life support, they are bankrupting the next generation trying to keep it alive.

“We expect that the recovery will only gradually gain momentum,” Ben Bernanke forecast, trying to manage expectations, “and that the economic slack will diminish slowly.”

Really? Oh, the wonders of modern medicine. Now, with 20/20 vision, the Fed chief can look ahead and tell us what will happen next. If only he’d gone to the doctor two years ago!

Stocks are rallying all over the world. Economists are putting on their spectacles and looking to the future. Bankers are cashing their checks and laughing all the way home from work.

“That sense of unremitting free fall we had a month or two ago is not present today,” says White House economic advisor Larry Summers.

Barron’s Big Money Poll shows professional portfolio managers are bullish again. They’re looking for the Dow to gain 7% this year…and 17% by the middle of next year.

(This is good news for us. We were beginning to look around and notice that that too many stupid people agreed with us. But now that we see the pros are in the opposite camp…we can sleep more soundly.)

The proximate cause of all this optimism is the vigor with which the people who didn’t see the problem coming have gone about fighting it. Mr. Market may taketh away…but Mr. Federal Official putteth back. At least, that’s the logic of it. So far, in the U.S.A. alone, they’ve earmarked a sum nearly three times the cost of fighting World War II. Not all of that are direct cash outlays. Much of it is in the form of financial ‘guarantees’ and ‘investments’ (such as buying up Wall Street’s smelly derivatives). Still, it’s a lot of money.

Normally, in a correction, the supply of money – M1 – falls. Asset values are destroyed…borrowers default…money disappears into vaults and mattresses. But this time, so vigorous has been the authorities’ response that M-1 is actually increasing at about a 14% annual rate. The money’s got to go somewhere…

Here in London, the government has taken a similarly energetic line. The Bank of England has fallen in line with the government and boosted its balance sheet by more than two times in the last 12 months. Banks have been shored up with easy cash. Rates have been cut. Stimulus budgets have been passed. And yesterday, the government bailed out LDV, a maker of industrial vans.

Naturally, the bailout comes with some strings attached. The government stressed that this was just a ‘short term’ solution, pending a rescue by a Malaysian group. And hey…wait a minute…the company also had to promise not to move its production out of the United Kingdom. Who needs Smoot and Hawley when you can protect your markets using central bank cash?

So we see, the feds are on the case. Investors are coming back into the market. The banks have money again. What could go wrong?

Why…everything…of course! Luckily, when it does, our dear readers will be ready.

*** In the first place, the rally in stocks is likely to be a bear market trap. A real boom would require a real increase in profits. That is not likely to happen. Housing prices may be nearing a bottom – or not – but they’re not likely to begin another huge rise again in our lifetimes. Once a bubble pops…it’s usually over for that sector at least until another generation comes along. It will be a long time before homeowners forget what happened to their house prices. And it will be a long time before investors are willing to make big gambles on housing debt.

It will also be a long time before Americans return to free-spending ways. Not only do they no longer have the collateral to back up more debt, they are also growing older and wiser. Consumer spending rose 2.2% in the last quarter. But that is probably a fluke. Americans can’t spend what they don’t have. And they must save for long retirements…knowing that their houses and stocks could lose value at any time.

The last report we saw showed the saving rate was back towards 5% – a big jump up from zero a year ago. There is no way savings AND spending can go up at the same time.

What’s more, their incomes are falling. Wages and salaries are down 1.2% over the last year. As this depression sinks in…Americans will lose more income.

USA Today opens with a cover story on “the new homeless.” There’s a photo of a 53-year-old man sitting in his tent. It’s a “temporary situation,” he says. But the tent city in Pinellas County, Florida, may be home for longer than he expects.

“Tent cities filling up with casualties of the economy,’ says the headline. “Some middle-class workers with college degrees find themselves displaced by layoffs, foreclosures.”

“Economy contracts ‘faster than in the 1930s,’” says a headline in today’s Financial Times. A research outfit is forecasting a drop in British national income of 4.3% – substantially worse than the government’s guess. The reason for this new outlook is that “world trade has collapsed by more than forecast,” explained an economist on the case. The report went on to forecast UK public debt at 100% of GDP.

The story is not much different in the United States. GDP is falling at a 6% annual rate. If this continues for a few years, it will make this depression worse than the Great Depression of the ’30s – which hit America much harder than it did Britain (probably thanks to the forceful response of the Hoover and Roosevelt administrations).

Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s.

By our calculation, the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage. Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.

Our guess is that the feds – who still have no idea what is going on – will choose the second solution…something much worse.

But what, exactly? We have some ideas…some guesses…stay tuned.

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