Even the most bearish pundits are sounding a bit more optimistic lately: Specifically, they are grudgingly admitting that we may have avoided another Great Depression.

But they quickly point out that we may still steaming full-throttle toward doom, this time as a result of the Fed and Congress removing the cheap money and spending stimulus that saved our necks.

Martin Wolf of the FT, for example, thinks the government will have a devil of a time managing this transition smoothly.

Right now, banks are printing money courtesy of subsidized borrowing rates from the Fed. They're also dumping their crappy mortgage assets on the Fed's balance sheet in exchange for fresh cash, thus avoiding further asset write-downs. As soon as the Fed begins to reverse these measures, banks may come under pressure again.

Worse, the Fed is still buying mortgage securities in the open market, thus helping to keep mortgage rates low. If the Fed abandons this crutch, mortgage rates could rise, putting new pressure on the housing market.

Lastly, the government's fiscal stimulus, which has driven some of the rebound in GDP in the last two quarters, will start to peter out in 2010. (my comment: this of course assumes there is not more stimulus coming, which I believe there will be... lots of it)

Meanwhile, unemployment is nearly 10% and GDP is nearly 4% below its peak. Until hiring resumes in earnest, the government and Fed will likely remain under intense pressure to keep their foot on the gas--lest they snuff out the incipient recovery. On the other hand, if they wait too long, they'll risk a bout of severe inflation.

Whatever happens, Wolf thinks it is highly unlikely that the Fed and Congress will get it just right.

(2) Too Big to Fail, Regulators Learned Wrong Lesson from Lehman's Fall

A year after the failure of Lehman Brothers, global regulators are still dealing with the aftermath and struggling to learn the lessons of the great panic of 2008.

Martin Wolf, chief economics commentator at The Financial Times, says letting Lehman fail was the right course, if only because it forced regulators to "grapple with the crisis properly." The steps taken in Lehman's wake ultimately stabilized the global economy and reinvigorated the financial markets -- at least for the time being, Wolf says, as we discuss in more detail in a separate segment.

But Wolf fears regulators learned the wrong lessons of Lehman's bankruptcy, i.e. that they can't ever allow a large financial institution to fail.

"That's unworkable," Wolf says. "How can you have a capitalist financial system in which all the major institutions are government guaranteed?"

The "right" lesson of Lehman's failure is we need a new set of rules and regulation "which allow us to close down institutions which are in fact failed without causing a panic of this scale," Wolf says." I believe that will be possible to do."

Stressing the need for a "credible bankruptcy option" for big firms, Wolf describes the basic framework for these rules in the accompanying clip.

But even as he's advocating new rules and regulations to change the "too big to fail" doctrine, Wolf cautions against overzealous regulation, such as the Fed's reported plan to strictly curb compensation at major financial firms.

Thanks to unprecedented central bank intervention and massive stimulus programs, the global economy is no longer teetering on the edge of a cliff. "There's no doubt we have come through this in the short run very, very well," says Martin Wolf, chief economics commentator at The Financial Times.

That's not to say all is well. FAS,JPM,MS,GS,BAC,C">A year after Lehman's fall, Wolf questions if we have a "truly healthy financial system" to keep the recovery alive. Even if the economy continues to rebound, "it's going to fell quite depressing, [with] high unemployment" for several years to come, he claims.

And, that's not to mention, the biggest risk of all: inflation.

Short to medium term, deflation remains the top concern, but Wolf acknowledges that could change on a dime if investors decide "the U.S. government and British government will never mange their public debt problems." If that happens, "then there could be a real flight from these currencies and that would generate as it did in the 70s, worldwide inflation," Wolf says.

Inflation, recessions, a bear market… and bell bottoms. I doubt anyone wants to relive the 1970s.