Look for current rally to fizzle and for financial stocks to remain under pressure in 2008.

While the perhaps heroic, certainly desperate actions of Ben Bernanke and the Federal Reserve bank have brought some relief to the Wall Street investment banks, commercial banks, and mortgage companies look for the relief to be very short lived.

In my opinion, the problems with the world’s financial system, with the United States in the lead position, are just far greater than the solutions. In the end we will be lucky to avoid a financial meltdown.

The desperate nature of the Fed’s recent actions should give us an idea as how close to the financial abyss we truly are. Exchanging government treasuries for toxic waste mostly worthless subprime mortgage and CDO paper and the like seems to be a bad exchange to me.

Cutting rates at a time when inflation is picking up and the dollar is in a strong downtrend risks a unhealthy dose of inflation, perhaps even hyperinflation, as consequences of that interest rate cutting action.

Bernanke’s high level of activity (interference?) in the way a capitalist economy is supposed to work may well prove to be a disaster as events unfold. At some point the risk is high that he will make a tragic mistake. Perhaps he already has as the Bear Stearns bailout has enraged Bear Stearns investors and already the Fed is backpedaling as the $2.00 a share price paid by JP Morgan, demanded by the Fed, is already subject to negotiation.

It is the trillions of dollars of hard to value, probably largely worthless, derivatives that threatens the world banking system. The likelihood of further serious problems, perhaps the failure of a few big banks, brought about as the derivatives market falls apart, is high.

I would be looking to sell the recent run up in the financial sector stocks.

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