Dow Beats Doomsayers

"The banking system is very strong, unlike the '80s where a lot of the savings and loans were under stress," said Bies, who is the Fed's resident expert on bank regulation and is retiring at the end of March.

Indeed, the banking stocks are not reflecting too much worry about spillover from the subprime mortgage market. The PHLX/KBW Bank Sector Index reached a new all-time high Tuesday, jumping 0.5% on the day. Likewise, the Amex Securities Broker Dealer Index jumped 0.8% on the day, just about one point away from its all-time closing highs.

Perhaps the subprime mortgage market blowup is already priced into the stock market. It's certainly not news that historically low interest rates fueled some aggressive lending standards -- standards that Fed banking surveys show already are scaling back.

Bianco Research, citing the Web site www.mortgageimplode.com, notes that since December 2006, of 25 of the largest subprime lenders, 23 have either closed, restated earnings or are up for sale/sold by their parent.

"It looks like the worst of the subprime blow-up is either over, or about to be over," Jim Bianco writes. "While it is bad for this sector, if we are still searching for systemic fallout, and it has not yet happened, what more needs to occur to make it a systemic problem? At this point, what more can happen?"