Whew! The imminent financial-system collapse, which some had feared after the Bear Stearns meltdown, didn’t come to pass, and first-quarter earnings haven’t been all that bad. But the buyers climbing over each other Friday afternoon to make sure they don’t miss getting in on the big recovery evidently weren’t watching CNBC before the market opened that morning (ordinarily, we wouldn’t blame them), when veteran economist Joseph Stiglitz reminded us that the credit crisis did more damage to the financial system than can be undone in just a few months.

Maybe it’s not the kind of news the media thinks people want to hear right now, because even the sensational headline that CNBC.com chose for its summary of Stiglitz’s comments doesn’t seem to have spurred much circulation outside the blogosphere. And yes, we know that you don’t want to hear “one of the worst economic downturns since the Great Depression” either; we don’t like people losing their houses and their jobs any more than you do. But we also think it’s important to appreciate the fact that big risks still remain in the economy, and thus in the market - despite implied volatility levels that are heading back into “all clear” territory.

Stiglitz, once Chairman of the President’s Council of Economic Advisers and later Chief Economist for the World Bank, explained why he thinks, “in some ways, this is the worst recession we’ve had in a long time,” as follows:

Most of the other economic downturns [since the 1930s] have been one of two sorts. One of them is inventory accumulation. There’s a slight slowdown, firms get rid of their excess inventories, and the economy just picks up where it left off. The other one is, inflation [builds] and the Fed steps on the brakes a little too hard. It realizes that it stepped on the brakes too hard, and it takes its foot off the brakes and then puts it gently on the accelerator, and the economy takes off again.

This time is a little bit different, because, at the center of the economy are the financial institutions, and they’ve been very badly impaired. It’s not just like excess inventories; it’s not like the Fed has stepped on the brakes too hard. [The Fed] could put its foot on the accelerator, but [this time] the banks aren’t going to be lending. The impairments to their balance sheets are severe.

In response to a viewer question about small business, Stiglitz elaborated on how weakness in finance is likely to spread into the general economy:

Small businesses are really the source of job creation in the economy, and a lot of the innovation. They depend very heavily on banks, and that’s where I get very worried. As we see the financial system going into a squeeze, the people who are really going to be hurt are the small businesses. The big companies, they can borrow in Europe, they can borrow anywhere there’s liquidity, but these [small businesses] are the companies that are really going to suffer.

Add in the slowdown in spending caused by consumers’ inability to continue funding their purchases with home-equity credit, and you have a scenario in which, Stiglitz says, the President’s economic stimulus package is “a drop in the bucket” that will disappear into a black hole of sub-prime losses and an unavoidable increase in net personal savings.

Okay, so there’s nothing here we haven’t heard before, and it’s no surprise that media fatigue has set in. We get it. We also get that it would be dangerous to let complacency cause us to forget how little really has changed since the credit contraction began to unfold and brought stock prices down initially to the levels they’re rallying close to once again.

That said, there’s no question that the short-term bias has been to the upside, and it looks like the bulls might not be satisfied (and bears won’t feel safe to start shorting again) until there’s a serious battle around the downtrend-resistance and 200-day moving-average lines on the charts of the major indexes. What’s more, the rally conceivably could continue, no matter what the state of the real-world economy may be: markets can remain irrational and overbought (or oversold) long enough to cause serious damage to a portfolio that’s biased in the wrong direction. This is why we concentrate on strategies that are essentially non-directional, and balance our monthly positions with a variety of trades that spread out the directional risk.