Markets have cast aside their misplaced optimism faster than predicted, ending the "sucker's rally" as some are calling last week's rise in stocks. With inflation still high and asset prices tumbling, some are looking again to gold as a safe haven. What happened? For starters, short-sellers buying up stocks in response to the SEC's restrictions on their tactics scattered once it became clear they were buying up losses. But the biggest catalyst had to be Merrill Lynch's announcement that it would write off another $5.7 billion. This followed the seizure of two more banks last weekend and evidence of growing desperation by Washington to inject liquidity into the US housing market by convincing four big banks to start issuing covered bonds. The American housing market continues to deteriorate, even though the glut in housing supply is showing signs of abating. And fuel prices are so high that schools are considering laying off teachers, cutting back on sports and even cutting classes backto four days a week. Whoever comes into the White House in January will be staring at a $482 billion hole - meaning less money for schools and less money to continue the piecemeal bailout of the US financial system. Now who do we know who has $500 billion to lend the US? Hmmm. Government spending here in the Gulf just goes up, up and up - 26 per cent in the first quarter - as oil revenues keep piling up. It may be time to start drawing parallels not with Japan, but with the Asian financial crisis of 1997 and 1998. Then, the countries in trouble faced a balance of payments crisis. Economists are quick to point out that the US doesn't have the same problem. It prints the world's reserve currency, the dollar, after all. But given the increasing doubts about the health of the US financial system and the need for a systemic bailout of the US banking system, it seems that the effects and potential solutions may have some similarities. In Asia, the IMF made the mistake of recommending that central banks raise interest rates to stem the outflow of capital fueling the run on their currencies. In economies with high savings rates, that squelched economic growth and made matters worse. The US has negative savings rates and now needs foreign capital badly to shore up its financial system. So perhaps the Fed should stop worrying about growth and pretend it is in a balance of payments crisis by raising interest rates. This would make it more profitable for healthy banks to lend to healthy borrowers and give more incentive for cash-rich foreign investors and sovereign funds to forget the massive losses they've already suffered on their dollar investments and take the plunge anew into US assets. Already, Gulf investors are pulling out of the US real estate market, Abu Dhabi's purchase of the Chrysler building notwithstanding. Some economists will no doubt say this is nonsense, because it would hit the economy as it goes through a difficult period, exacerbating the default rate and making things harder for the banking sector. But it now appears that much of the system is rotten anyway, so accelerating the demise of that part of the financial system may enable the US to get on with bailing out the healthy part of the financial sector, writing off the losses, restructuring the industry and disposing of the discounted assets so the economy - and the rest of the world - can move on. Take the pain: that's what the US and IMF advised Asia to do a decade ago. Maybe it's time the US try a dose of its own medicine. For those here in the UAE who are smoking property crack and live in a fantasy world believing that property prices will never decline, here is a sobering reminder of reality: US home prices have fallen 15.5 per cent in the past year and it is hard to find an economist who thinks they aren't going to fall another 5 to 20 per cent. Anyone who borrowed significantly to finance their home is now living in a world of hurt. Now consider Standard Chartered's finding that here in the UAE there is virtually no gap between the price of existing properties and those still under construction. Inhale deeply.