The U.S. isn’t the only country rolling back on free-market principles. Communist China is also busy bailing out its economy. Over the weekend, the People’s Republic announced a $586 billion ’stimulus’ plan of it own. U.S stock futures are up on the news.

“The Master,” Alan Greenspan, yesterday admitted he made a “mistake.” We wonder if this is the first of such admissions from the former Fed head. Speaking to Congress, the one-time gold bug and Ayan Rand acolyte, said he had found “a flaw in the model” that he perceived “is the critical functioning structure that defines how the world works.”

This is what it looks like when the shit hits the proverbial fan. In this case, the shit being one subprime meltdown, eight years of a monkey in the White House and and $1 trillion in chaotic government hand outs. The fan being everything just about everything else. Yesterday, the talismanic Dow plunged 514.

“Investors are taking losses of up to 90% in the $1.2 trillion market for collateralized debt obligations (CDOs) tied to corporate credit,” reports Bloomberg. Much of the losses have been triggered by the failure of Lehman Brothers and Icelandic bank.

– The Washington Post reported on Saturday that a surge in government spending “could send the federal deficit soaring toward $1 trillion this year, creating the deepest well of red ink since the end of World War II.”

After deciding to nationalize Fannie, Freddie and AIG, Treasury Secretary Hank Paulson is considering setting up a federal government entity to hold banks’ debt. This from Reuters:

U.S. Treasury Secretary Henry Paulson has been shopping around a proposal to congressional lawmakers that would create an entity to deal with the bad debt, similar to what was done in the savings and loan crisis, a congressional aide said.

– The Fed, desperate to relieve the panic that has gripped the credit markets, has almost quadrupled the amount of dollars central banks can auction around the world to $247 billion.

– According to Bloomberg: “The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ‘to address the continued elevated pressures in U.S. dollar short-term funding markets.’ The Bank of England, the Bank of Canada and the Swiss National Bank also participated.”

– This flood of cash seems to have cheered Wall Street. “US stock futures pointed to a stronger start. S&P 500 futures rose 16 points to 1,178.90 and Nasdaq 100 futures improved 21.25 points to 1,668.25. Dow…

– Lehman Brothers is doomed opines Bloomberg’s Michael Lewis this morning. Ironically, Lewis says Lehman’s (NYSE:LEH) fate is sealed because, following the government’s bailout of rival Bear Stearns, those who do business with Lehman don’t care too much if it stands or falls. The belief is the government will step in to pick up the pieces should Lehman fall apart.

The Bear Stearns bailout was supposed to prevent the crisis from rippling through Wall Street. Obviously it hasn’t done that. It’s merely thrown the crisis into slow motion and prolonged the agony.

“U.S. stocks strike solid gains on second-quarter GDP,” ran a gleeful headline yesterday on MarketWatch.

“Investors, showing no sign of concern about the outlook, took the GDP report at face value and pushed stocks up sharply on the news,” ran another breathless piece of editorial, following data that showed U.S. GDP up 3.3% in the second quarter.

But as Addison Wiggan and Ian Mathias pointed out yesterday in Agora Financial’s 5. Min Forecast, the government’s stimulus check program and a weaker dollar were partly responsible…

U.S. consumer confidence is on the mend, we are told. The Conference Board Consumer Confidence Index rose to 56.9 for August from a revised 51.9 in July. This was a higher jump than forecast. The only problem is on the same day that the Conference Board came out with its jaunty view of the collective mind of American shoppers, ABC News spoiled the party by telling us that consumer confidence was at a record low for the week.