The bear rally continues…it is about to enter its 9th week. And the War on Capitalism continues!

The Dow rose again yesterday – up 101 points. Oil went up too – to $56. The dollar held steady. And gold was up again…to $911.

“Emerging market surge…Investors pile in on hopes of improved global economy,” says the Financial Times.

And this from the Telegraph: “Recession ‘over by Christmas,’ says Fed chief Bernanke.”

He did not say “Mission Accomplished.” That phrase was used too recently by another high official. In that event, the mission turned out to be not as accomplished as he thought.

Will the government’s War on Capitalism turn out better than their War on Terrorism? Or their War on Drugs? Or their War on Poverty?

“The last successful government program was WWII,” said Jimmy Breslin. Since then, almost all of them have been useless or counterproductive. But year in and year out, they’ve given federal hacks more money and power.

The current War on Capitalism didn’t begin a year ago, by the way. The feds have been conducting a dirty, undercover campaign against the free market for many years. Instead of permitting willing lenders and borrowers to set the price of credit, for example, the Federal Reserve imposed its own short-term rates many times over the last 50 years. Eleven times during that period, capitalism tried to correct the “borrow and spend” economy. Each time, the feds rushed in with more credit on even easier terms. By the recession of 2001-2002, the feds were intervening with such heavy hands that it set off the bubble in housing prices in the 2002-2007 period.

And when the bubble exploded, the fed’s dirty campaign turned into a major war with huge pitched battles…and millions of casualties.

Bloomberg reported yesterday, “nearly a quarter of US homeowners are underwater.” When the Fed flooded the market with so much easy credit, it pushed up housing prices way beyond what people could afford. Capitalism struck back – blowing up the dikes that held all that liquidity in place. But the explosion blew out the cushion of equity that kept homeowners afloat. House prices are still falling at a 14% annual rate. “Less than before,” say the bulls. But still going down.

This has left some communities – such as Salinas, California – with as much as one-third of the housing stock worth less than the money owed against it.

And in Victorville, California, the bank decided it had too many foreclosed houses. An entire new development of 16 houses – some completed, with granite countertops and all…some incomplete – had been foreclosed. Squatters and vandals were making a mess of the place. So the bank demolished the lot of them.

And overstretched homeowners who have an “Alt-A” or “Option ARM” mortgage are in trouble come 2011…when the majority of these loans will reset at a higher rate. You think it was bad when the first wave of defaults hit the United States? This could have even more catastrophic consequences.

Today, the results of the stress test on banks are out. They show some banks in good shape. Others need more capital. Bank of America, for example, is said to need another $34 billion. Wells Fargo needs $15 billion. GMAC and Citi both need more cash.

But investors decided to look at the part of the glass that was full rather than the part that was empty. They pushed up financial sector stocks generally.

If capitalism had its way, it would sort out the banks quickly. Banks that couldn’t raise the money they needed would go out of business. Their assets would be bought up by the solid banks. Life would go on.

But the feds’ war against capitalism prevents this kind of simple resolution. Instead, weak, mismanaged institutions are kept alive with taxpayers’ money.

“Trillions of dollars have been thrown at the system so that we can avoid the natural process of creative destruction,” write Matthew Richardson and Nouriel Roubini in today’s Financial Times.

Our next question: where is all this money going to come from?

“This morning, all we can do is cringe. Miller is setting himself up as the historical proxy for the mainstream disaster of the day.

“The current ‘bull market’, reasons Mr. Miller grasping at straws, is behaving ‘much more like the rally that ended the 1973-1974 bear market or the one that began off the bottom in 1982, or even that which erupted in March 2003 from the last debt deflation scare.’

“Banks, he believes, ‘have the biggest potential to outperform.’ Wells Fargo, Capital One and American Express are his favorite speculations. This guy will chase anything. In response, we’d like to announce our latest addition to the short watch-list: Wells Fargo, Capital One and American Express.”

*** On page one of the Telegraph is another headline, which is almost sure to be correct.

“Your country needs YOU to work five years longer.” And accept big cuts in health and education spending. And pay more taxes.

There is no mystery to this news item. You don’t have to be a clairvoyant like Ben Bernanke to see that 1) living standards are certain to go down in England and America…and 2) governments will have to raise taxes and/or cut ‘services.’

We have put the word ‘services’ in quotes because we don’t you to get the wrong idea. Most government services are not services at all…but disservices.

Each year since the war, government budgets have gone up. Now, there are more people getting money from the government than there are taxpayers. And what do the taxpayers get for their money? Is the country really a better place than it was in the Eisenhower era? Are we better governed? Are we safer?

We are certainly better off in many ways…but all the ways we are better off are the result of technology and private innovation, usually in spite of government. A couple of inventions have made life much more agreeable. Air conditioning is a major boon to gracious living in the southern states. And the Internet – with free telephone service, via Skype – is another major boon.

*** This year, the U.S. stopped being the United States of America. Yesterday, it was reported that the states now get most of their money from the feds.

“He who pays the piper calls the tune,” is the old expression. The feds are paying the piper; the states have to dance to whatever tune they propose.

That’s the end of the federal system…the end of the system announced in the U.S. Constitution…which was a union of sovereign states. Now, it’s a fully centralized system…a popular democracy of the worse sort…in which celebrity hacks are elected and rule without any real shame or limit. Even Louis 14th, France’s Sun King…an absolute monarch…knew he was subject as well as monarch. He was God’s man on the throne of France. Now, America’s leaders answer to no one…except the mob of TV-addled voters.

The song the feds are singing is a song of higher taxes…more regulation…bigger government budgets…and huge new deficits. The War on Capitalism will cost trillions. The direct costs – and the indirect cost of a battered, shackled, tortured market system – will have to be paid somehow. The good news is that citizens will get fewer services from their government. The bad news is that governments will reduce services in the worst possible way – firing teachers, rather than educational bureaucrats…filling holes in bank balance sheets, but failing to fill the potholes in the roads…and so forth.

And more bad news is that they will raise taxes…

The good news is that you can protect yourself from the feds’ bad decisions. Think of it as your own ‘personal bailout’…since they certainly don’t have your best interests in mind. Get all the resources you need in our financial survival library.

Poor old Ireland. It’s been a terrible year on Erin’s Isle. The country that most benefited from the boom suffers more than others from the bust. That’s just the way it works. Property prices are in free fall. Unemployment is soaring. And now comes Mr. Obama, pulling the bog out from under the bog trotters.

Your editor operates a mini-multinational. Yes, we have offices all over the world – in Paris, London, Madrid, Buenos Aires, Johannesburg, Melbourne, Bombay…and Waterford, Ireland. That is why we spend so much time traveling…just trying to keep up with business.

We moved to Waterford to take advantage of the 12% corporate tax rate. You gotta be somewhere? Why not go somewhere where they don’t tax you so much?

In practice, this has not proven very important, because we never made enough money in Ireland for the tax rate to matter. Still, it was nice to know that if we ever did make any money in Ireland at least we wouldn’t have to give so much of it to the Irish government.

But along comes Obama’s anti-tax haven initiative…and poor old Ireland is even poorer. The American president proposes to do away with Ireland’s tax advantage altogether…at least as it applies to American firms, who are the main beneficiaries. In fact, he’ll penalize U.S. firms abroad. Not only will they pay local taxes…but they’ll pay U.S. taxes too!

Yes, our poor little micro-multinational will have to pay more taxes. And your poor editor too.

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