“One market bubble may be an accident;” begins an article in the Financial Times, “two in the space of a decade begins to look like carelessness.”

In our view, the bubbles in housing and debt were the result of neither accident nor carelessness. They were the result of Fed policy.

The Fed thinks it has two mandates: to preserve the value of the U.S. dollar…and to maintain full employment. The two are as incompatible as a sanctimonious governor and the Emperor’s Club. At some point, you have to choose. What’re you going to be – a governor or an emperor?

Fed governors chose the easy path – they chose to try to boost up the economy…and let the dollar go to hell. That’s why the greenback has lost half its value against major foreign currencies since the beginning of this century. And it’s why we have had two major, related asset bubbles so far this decade – one in housing and the other in housing debt. And it’s why we have also had a credit crisis…from which we now seem to be emerging.

People are beginning to put two and two together – to make the connection between the Fed’s aggressive attempts to put more money and credit in circulation and the asset bubbles. And now that they’ve got their slide rules out…they’re wondering about the oil price too…and gold…and food…and consumer prices…

…and now, in this moment of high anxiety, the whole world turns its weary eyes to Paul Volcker. Like France recalling the old Hero of Verdun – Marshal Petain – in ‘42, the press goes to Volcker and asks his opinion.

The latest Bloomberg report:

“Volcker, who engineered a surge in interest rates to 20 percent when battling consumer price gains 18 years ago, said ‘there is some resemblance to where we are now in the inflation picture to the early 1970s.’ The Fed failed to contain a pickup in prices at that time, spurring the acceleration of inflation later that decade, he said.

“‘If we lose confidence in the ability and the willingness of the Federal Reserve to deal with inflationary pressures’ and buttress the dollar, ‘we will be in real trouble,’ Volcker said. ‘That has to be very much in the forefront of our thinking. If we lose that we are back in the 1970s or worse.’

“Consumer prices rose 3.9 percent in April from a year before, compared with an average rate of 2.7 percent over the past decade, a Commerce Department report showed today. Volcker said there’s ‘a lot more inflation’ than reflected in government figures.”

Yes, dear reader, the battle between inflation and deflation has been noisy and indecisive. But the real cost of this war hasn’t even begun to register. Unbeknownst to most observers, almost a whole generation of wealth building has been wiped out. Wages are back to levels of the ’70s. Stocks have gone nowhere in 10 years. And houses are headed back to levels of the mid-’90s.

On this last item, we have some news headlines. Foreclosure filings rose 65% in April, from the year before. In California, foreclosures hit a new record high. And land prices in Las Vegas, away from The Strip, are down 24% from a year earlier.

Toll Bros. (NYSE:TOL) says its sales will go down 30% in this quarter. Mortgage fraud cases are up 31%, says the FBI. And in England, realtors say the market is the worse they’ve seen in 30 years.

How cometh these things to pass? Fed governors have been enjoying their own emperors’ club, if you know what we mean. They’ve had their cake – and eaten it too. Until now, they could cut rates and increase the money supply, and still hold their heads up look Americans in the eye: “Do you see any inflation? We don’t see any inflation.”

Alas, the rumors are out…the receipts are turning up…and people are appalled. They’re turning on Alan Greenspan, in particular. We opined years ago that Greenspan’s reputation was inversely correlated to the price of gold. As gold rose, Greenspan’s stock went down. As you will see, below, this trend probably has further to go.

Even Ben Bernanke has disavowed his former boss – saying that the Fed can and should spot bubbles and lance them before they get too bad. But while Bernanke talks tough…he has shown himself unwilling to make Volcker’s tough choice. Between protecting the dollar and keeping the bubble pumped up, Bernanke has chosen the pump, not the lance.

*** Yesterday, we mentioned the oil market. Today, we slide in deeper.

You’ll recall, dear reader, some time ago we guessed that the feds’ efforts to keep consumers consuming were essentially inflationary…and that the inflation they caused would tend to go more into gold and oil than into economic growth or asset prices.

Since then, the price of oil has shot up over $100. Yesterday, it hit a new record at over $126, before falling back to $124. Gold, meanwhile, has traded above $1,000 – and now is correcting in the mid-800s.

This is already a major adjustment. It comes along with a major adjustment in the purchasing power of the dollar, generally. Americans’ global purchasing power has been cut in half. The value of their assets – on the world market – are only half what they were during the Clinton years. And the value of their most precious asset – their time – has also been greatly reduced.

This is why you see so many Europeans in the United States…America is a cheap place to visit. It’s also why U.S. export industries are reviving; the country has become a low-cost producer for many things; it is now a place where richer nations can consider outsource production.

All of this has gone almost ‘according to plan’ – that is, it is pretty much what we guessed would happen.

But now, we have to ask: are these adjustments enough?

You’re expecting us to say ‘no,’ aren’t you? Instead, our answer is ‘maybe.’