Blustery March winds blew through global markets again yesterday.

At one point, the Dow was sold off to under 12,000, before recovering; and the London stock exchange took a beating too.

Investors are “jittery” says the Financial Times, over the subprime crisis in the United States. European and Asian stock markets suffered their second biggest losses of the year yesterday.

One thing is clear - volatility has returned. That long, lazy, self-assured and complacent period that annoyed us for so long seems to be over. And good riddance.

We are literary economists and market voyeurs, here at the Daily Reckoning. We like action...something to look at...someone to laugh at. For instance, there is now a restaurant in NYC that now boasts a ‘luxury pizza’ topped with (among other things) crème fraiche, eight ounces of caviar, and four ounces of lobster tail. And the price tag for this edible extravagance...$1,000. We’re not sure, but this seems like a bit too much...and a bit too late.

We like a good comedy as well as a good tragedy...a story with some excitement and drama...something that causes our ribs to heave and someone who gets what he has coming to him. And at last, we seem to be getting one.

For months...no years...we have been watching...waiting...hoping. “Something has to give...” we kept saying. “When the end comes...” we warned ominously. “This can’t go on forever...” we wrote so many times we began to wonder if it was true.

Well, the end may still be far away. But at least a few more people can see it coming. They’ve seen prices go up and down sharply. It doesn’t take too much imagination to see them going down decisively.

Which means that the price of insurance is going up.

“Banks face rise in cost of default protection,” says the FT. Credit Default Swaps are going up. So is the protection available to the average investor. Yesterday, the VIX reached its highest level since June of last year.

What is gratifying about this sort of action is that it has genuine heroes and cads...people whom the gods reward for their virtue or destroy for their vices. Take New Century Financial, for example. Teetering on the edge of bankruptcy, we regretted that we couldn’t give it a push. But yesterday, along came Barclay’s bank to do what we couldn’t. The British bank demanded $900 million, and wants it right now.

But don’t worry about Barclay’s. “All of our exposure to U.S. subprime lending is fully collateralized...” it told the press. “We do not envisage any material losses due to exposure to the sector.”

We are not privy to the details. But we can also perfectly well imagine that Barclays is misinformed. All the subprime debt was fully collateralized. That was not the problem. The problem was that the collateral was fraudulent.

Encouraged by rising property prices, aided and abetted by appraisers, mortgage brokers, and real estate agents, enabled by ‘low document’ lending procedures - neither the subprime collateral, the subprime securitized debt, nor the subprime borrowers were worth what they said they were worth. Now, with property prices falling in many parts of the country, it may be impossible to unload the foreclosed houses for anything near to what lenders had expected - especially if subprime troubles spread into the rest of the mortgage market.

“The reliance on judgment and reason will be pushed aside,” said 80-year-old economist Henry Kaufman in New York on Tuesday night. What we found interesting was his use of the future tense, referring to the growing tendency to replace wisdom and experience in the financial markets with sharp calculations. If there is a half a point of yield to be gained by exchanging yen for ringgit...buying emerging market bonds...leveraging with zlotys and hedging with euros...even though the old timers might judge it too risky or too complicated, the mathematicians will find it irresistible.

We fuddy-duddy literary economists are not the ones who have made money in this liquidity bubble. We’re not complaining. Our gold rose from a low of $252 in 1999 to around $645 last time we looked. But the real money was made by those who reached for yield, leveraged it up and sold it on. Yesterday, we learned that Goldman Sachs actually outperformed analysts’ expectations. Yes, the master of the masters of the universe masterfully masterminded a masterstroke...theirs is a masterpiece of...well, never mind.

The report referred to earnings ‘in the first quarter.’ The quarter ended on February 23...only four days later world markets sold off on panic following a 9% drop in the Shanghai composite index. And what’s this? On February 27 Goldman was down 12% from its all-time high of 222.75 made on Feb. 22.

Talk about nice timing.

There’s something screwy about the whole spectacle. The numbers - for all their pretended precision - never seem to add up. How can you have a ‘quarter’ that ends in February? How could the whizzes on Wall Street make such errors about the value of their subprime debt?

Still, who says the top is in? Who says America is in decline? Who says the liquidity bubble is over? Who says there isn’t more money to be made?

We literary economists don’t presume to know and don’t pretend to care. But the show is definitely getting more interesting.

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