As I have said before, it was only a matter of who showed signs of panic first – investors or the Fed. It happened almost simultaneously when it finally went down, but the call was for investors to make.

A number of things happened yesterday, but the big news was the emergency 3/4 point cut in interest rates by the Fed. Why did they finally move, and move so boldly? Because stock markets had been down around the world for two straight days, ours having been closed for MLK Day. Our markets showed signs that they would tumble in response, hence the cut.

At first, it didn’t seem as though it would make a difference, even though past rate cuts rallied investors to put more money into the market. The short answer is that there is a real panic setting in, and more importantly there isn’t any more money to put into the market. Let’s examine where investment might come from one step at a time.

The first place you look for new money in the market is the shadow financial world of derivatives and very large bets places on small differences in price between now and the future. That’s been where a lot of the money propping up the market has come from, but the tens of trillions of dollars invested in these kind of things is evaporating daily. It wasn’t real to start with, and it is going back from whence it came. No money from this in the short term – the meltdown in financial instruments started by the real estate collapse is continuing.

The second place you might look is overseas. The decline in foreign markets showed that there is little appetite for stocks at this time. More importantly, the Fed has been slow to cut rates largely because the US Dollar has fallen terribly, close to $1.50 to the Euro where it was intended to be roughly at par. Lower rates mean a lower Dollar because dollars are simply cheaper to come by. Foreigners have no interest in having their assets denoted in Dollars when that currency is dropping and looks to continue its slide.

That leaves the general economy, and what’s really happened lately. Last Friday, President Bush announced an economic stimulus plan worth $145B, and our market promptly tanked. Why? It was too little, too late. More importantly, this is what killed the foreign markets on Monday and Tuesday. There is no confidence in the USofA, and that problem starts with Bush.

Why wasn’t there a bigger economic stimulus? Because the Federal deficit is about $107B higher in the first quarter of 2008 (the year starts in October) than in 2007. It will take drastic action to come up with a bigger stimulus plan than what has been proposed. Simply put, the war has eaten up whatever reserve we had.

Meanwhile, over the last year, all of the 401(k) money invested in S&P500 Index Funds has lost about 12% of its value, and we have every reason to believe this will continue. That’s the democratization of capital at work, and at some point all of the Baby Boomers planning to retire soon will have to weigh in on what they think should be done. The foreign markets have done their best to sound the alarm, and the result is a panic.

There is a kind of Republic at work here, a Republic of investors. It’s not particularly well organized, and we’re not sure just how much power any one Senator of this Republic has. What we do know is that when they start shouting, there is quite a lot of noise. And when they all head for the exits at once, the doors aren’t big enough to prevent a crush. George Bush and Ben Bernanke do not get to do whatever they want, at least not forever. If we have one thing to take heart in, it’s that.

Meanwhile, we have a panic. Time will tell if this gets everything out in the open and settles the mess, or if it just keeps getting worse.