It all started with Bear Sterns, the venerable 85 year old, independent and fifth largest investment bank in the world. Inexplicably they went from “no problem” last Wednesday to a serious and potentially fatal liquidity crunch by last weekend. So, who cares and why should we bother?

And the answer is simple. In today’s intricately linked financial world, an uncontrolled collapse of Bear Sterns would have touched off a global meltdown in financial assets. World stock markets would have plunged, trillions would have been lost and recession or even global depression would have followed.

So, Ben Bernanke and his boys deserve a gold medal and a huge bonus for saving the world from a catastrophic financial collapse. The house was on fire and they managed to at least temporarily get the flames under control. Later it will be time to investigate who started the fire and who needs to be punished for the arson of the CDOs and sub prime fiascos, but right now we need to be concerned with survival, with continued liquidity so the system can function and with moving forward to a safer zone.

On Sunday the New York Federal Reserve cut the discount rate by 25 basis points in an almost unheard of weekend meeting just a couple of days before the regularly scheduled meeting of the FOMC. Then they created a 6 month loan program for the 20 prime broker dealers who deal in US Treasuries and so for the first time since the Great Depression, gave non commercial banks access to the Fed’s discount window, allowing them access to liquidity that otherwise wouldn’t be available. And finally, they approved a $30 Billion financing package to enable Bear Sterns to be bought out by JP Morgan for $2.00 per share.

All of this was designed to maintain liquidity in the system and prevent a collapse of an investment bank that would have taken down the entire banking global banking system ala the run on banks and lack of liquidity that touched off the Great Depression.

And then finally, on Tuesday they lowered interest rates a whopping 75 basis points to further add confidence and liquidity to the system. In the last few months the Fed has cut the Federal Funds rate by 2.25% and by Wednesday of this week, these same credit starved 20 investment banks have already borrowed $28.8 billion from the loan program set up just last Sunday.

Extraordinary times indeed.

So what does it all mean?

In a nutshell, Bear Sterns has failed, the Fed has guaranteed the buyout of one private firm by another and enormous amounts of liquidity have been pumped into a critically ill financial system.

And the markets reacted wildly to all of this action, much like a diabetic swinging from blood sugar highs to lows. The Dow saw triple digit high to low moves all week and a wild ride of -2.5% on Monday to +3.5% on Tuesday and finishing up 3.5% for the week.

But so far these big upwards moves have been unsustainable; the million dollar question today is whether the markets will be able to break out to the upside on a sustained basis.

And the answer is “maybe, maybe not.”

On the upside there has been so much liquidity and plunging interest rates and tax rebate checks on their way that almost certainly the economy will at some point react positively to all of this first aid. But on the downside is the overriding fact that with financial institutions and individuals so overleveraged, financial fire sales could continue both on the corporate and consumer level and we could be facing more rocky times and continued volatility ahead.

The future isn’t at all clear, but for today, at least, we have stepped back from the abyss of Financial Armageddon.

John Nyaradi is Publisher of Wall Street Sector Selector, an online newsletter specializing in sector rotation trading using Exchange Traded Funds.

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