Once again, I heard the talking heads on CNBC say that the current bear market is a “Crisis of Confidence.” That’s an interesting way to spin it. If I watch someone take a step off a cliff, is the problem gravity or my lack of confidence that he will defy it? As a whole, our system is over-leveraged. Banks and other financial businesses did not hold enough in reserves. We indulged in a credit binge. Asset prices are unsustainable. As credit unwinds, there will be fewer dollars to go around, and assets will be sold to raise capital. That is the gravity of the situation.

I heard another talking head say that the core problem is that housing prices are falling, and that was causing the other problems in credit. That is simply not the case. We are experiencing a credit unwind. Housing prices are falling because they are too high to be sustained.

Morgan Stanley is denying their situation. More specifically, they are denying a specific quote about the need to be acquired. However, I listened to their conference call. While they may not say they need to be acquired, the facts are that if they are not acquired, their solvency comes into question in 2009. And that’s the crux of the matter. This is not a crisis of confidence. This is a crisis of solvency. You cannot borrow today at the same rates you did a year ago, or even a week ago. While rates may come down a little in the near future, they will not be as low as they were a year ago. That said, let me be clear: rates are still going higher. Nobody wants corporate bonds.

There are tens of billions of dollars in corporate bonds that are going to expire in the next couple months. With credit spreads as high as they are, businesses are going to slit their own wrists. They will finance at high rates, then try to pass prices on to the consumer. The consumer will balk at the prices, and demand will drop. This will hit the bottom lines of these businesses. They will be making less, and paying more. If you can’t cover your fixed costs, you go out of business. Sadly, the correct thing to do in this environment is to cut back. Layoffs, factory closures, and asset sales will (hopefully) enable positive cash flow. Businesses must reduce their fixed costs.

And this leads to my crisis of confidence. I don’t have confidence that businesses will reduce their costs enough. The auto industry can’t. The airline industry can’t. Instead, they will go to the government and ask for bailouts. By the time they are turned down, it will be too late.

I sold some puts today. I wanted to take profit, and wasn’t confident in the direction of the market. I know the trend is down. You can read the above and see that I don’t believe the bottom has been hit. I just recently started watching futures. When you first start looking at indicators, you shouldn’t base your buying and selling decisions on them. You should slowly bring them into your decision-making formula. I’m pretty close to perfectly hedged right now. I’m on the sidelines.

Tomorrow is Friday. I’m very curious if any banks will fail tomorrow. If you are a business with your checking account at Washington Mutual, you owe it to your employees to get payroll to another bank. They are also part of my crisis of confidence.