US equities retreated sharply on Thursday, led once again by financial stocks. The DJIA closed down 283 points. Financial companies have been rocked over the past year by the deflation of the housing bubble, which begat the subprime crisis, which begat a broader credit crisis, which begat the liquidity crisis, which then begat a series of special liquidity measures and bailouts on the part of the Fed and Treasury.

Ultimately it all comes back to the housing market, so when the National Association of Realtors announced that existing home sales hit a new 10-year low in the month of June, financial shares tanked. We have consistently stated that the continued vulnerability of the housing market could significantly increase the cost of any bailout of the GSEs. It also hamstrings the Fed, making it difficult to raise interest rates to curb inflation for fear of worsening the housing and financial crises.

Fortunately -- and I say that with extreme sarcasm -- Congress was forward looking enough to provide a blank check and raise the country's debt ceiling by $800 bln as part of the housing bill. Just a day after the House approved that bill, shares of mortgage giants Fannie Mae and Freddie Mac tumbled more than 18%.

The fact that the government is prepared to backstop the GSEs provided some comfort earlier in the week, but I think the market is beginning to realize that the cost of the rescue could far exceed the CBO's estimate of $25 bln over the next two fiscal years. Interestingly enough, the $800 bln increase in the national debt ceiling equates pretty closely with the reported $780 bln in GSE liabilities linked to subprime and Alt-A mortgages. Coincidence?

Rep. Ron Paul (R-TX) pointed out in comments on the housing bill that dubious Fannie and Freddie securities will be swapped for US treasuries. And US treasuries are the assets that back up the dollar.

Similar junk for treasury swaps have been occurring for months now, through various Fed liquidity facilities. They've essentially allowed financial institutions, soon to include Fannie and Freddie, to offload their questionable assets on to the government and by extension the American taxpayer.

Reportedly the Wall Street bonus pool in 2007 was a staggering $26 bln and by the end of that year the various crises where already in full swing. As a taxpayer myself, I don't recall being invited to participate in the substantial profits of the financial firms as the housing bubble was inflating, but apparently I'll be paying for their poor decisions and the resulting losses.

Thursday's NY Fed Term Securities Lending Facility (TSLF) saw the bid cover jump to a record 2.07, suggesting that concerns about liquidity are indeed on the rise. However, all that liquidity is being used to shore up the banks' balance sheets, rather than being passed along to borrowers.

With Fed funds at 2% and the Fed pumping liquidity into the system at an unnerving pace, 30-year fixed rate mortgages have surged to a new one-year high of 6.77%. That certainly is not going to help the housing market find a bottom. As we've already stated, it all comes back to housing.

The US national debt is now in excess of $9.5 trillion and the new housing bill raises the debt ceiling to $10.6 trillion. They wouldn't raise it to that level if they didn't think we were likely to get there. Every previous debt ceiling has fallen by the wayside and there is no reason to believe this one will be any different.

The true cost of the Iraq War is measured in casualties, but the financial cost is now well above $500 billion. Each year we send more than $700 billion to various countries, many of whom don't care for us so much, to buy oil.

In January of this year the first baby-boomer filed for Social Security benefits. Over the next two decades, nearly 80 million fellow boomers will become eligible. That's more than 10,000 each day.

Estimates of total government liabilities, both funded and unfunded, including Social Security, Medicare, Medicaid range from $57 trillion to as much as $80 trillion. Yes, that's trillion with a "T".

One has to ask; just how much more can our $13 trillion economy stand before we trigger a flight from US treasuries and the dollar? Will the GSE bailout be the proverbial straw that breaks the camels back? Or will it be the next, as yet unknown rescue that pushes us beyond the tipping point?

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Gold Market Movers:

US financial stocks in worst fall since 2000

Washington Mutual hit by funding concerns

Mortgage rates rise to highest level in a year

Ford's loss approaches $9 billion