What would a rational market do in hindsight?

Paul asks the question, why was the [finance] market so manic-depressive?

Looking at the chart from Morgan-Stanley, why was volatility the name of the game for the S&P 500 since 1996? Why are Treasury yields on a downward path?

Since 80, the economy has been in long term deflation, judging by Treasury yields.

By 96 the economy began suffering energy shortages, which constrained the economy. The S&P traders would only obtain a return on investment if investment leaded to energy efficiency or more energy. The developing economies were using technology to advance oil efficiency. To maintain our consumption patterns we needed to use energy with an efficiency that maintained the energy allocations as they were. Bush understood the problem, but invading Iraq for oil didn't work.

The role of the federal government is to deflate, find simpler methods to deliver government goods and services, gaining economies of scale. Failure of Congress to properly deflate government services in the face of severe energy shortages is the problem.