Daily Reckoning editor Bill Bonner says irrational investment decisions are driven by two emotions: fear and greed. For the last few years, greed has dominated financial markets. But times have changed. Panic is sweeping the markets. Fear is now in control. Bill says fear is every investor’s worst enemy. And gold should be every investor’s best friend.

This from The Daily Reckoning:

Fear is back.

Delayed…denied…denounced…fear is back - and he’s mad as hell.

This week, panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you’d expect a big bounce. But not yesterday [Tuesday]. Stocks just kept falling, with the Dow down another 508 points.

Oil rose $2 to $90. The dollar held steady at $1.36 per euro. And gold rose $22. Coin dealers say they can’t keep up with the demand for bullion coins. No wonder; smart investors are looking for shelter. You can still join them - get in before the price of the precious metal skyrockets further. See here.

It’s full-scale war, in other words, with the forces of inflation in full retreat - even rout.

Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldats keep the huns out of Paris?

The news comes fast - too fast to take it all in. Russia has lent 4 billion euros to Iceland - ‘we’ll work out the terms later,’ said the nice Russkies. The Russians are also pumping $37 billion into its own banks. England says it will bailout its banks - with 50 billion pounds of equity and another 200 billion in loans.

The Australians already cut their key rate by 1%. And the Fed, the ECB, the Bank of England and Swiss, Canadian and Swedish central banks made emergency rate cuts. While coordinated rate cuts do happen on occasion - the Fed and the ECB made cuts following 9/11 - joint statements announcing a cut at multiple banks is a rarity. But in this market, we suppose anything is possible.

In the United States, the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies…or even loan the money directly to troubled firms. And not just financial firms. General Motors says it is turning off the lights at all its European production plants.

The poor lumpeninvestor doesn’t know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We’re unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We’re just so damned smart!

The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But we Americans know how make an economy hum - just give the consumer more credit!

But when the cycle turns from greed to fear…all that credit is like excess fuel in a crash landing. It tends to explode. When a bank takes a loss - say, from its holdings of sub-prime debt - the fractional reserve credit system sends out sparks. A loss of $100 million causes as much as $1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices.

So far this year, the world has lost $20 trillion in market capitalization. By September, U.S. property was down a total of about $6 trillion over the last two years. That’s why the feds are losing this fight - they’ve got much less fire power. They’ve just passed a bill to put $700 billion back into the system - buying up Wall Street’s mistakes. The Fed is loaning another $900 billion, according to yesterday’s report. Put all the bailout spending together and you get a figure that is still not even 10% of what Mr. Bear Market has taken away.

Yes, it’s all working against us now…the credit…fractional banking…and our own emotions.

Source: Fear is Back…and Mad as Hell