To me, the cause of credit collapse (CC) is the rapacious and unregulated, unfettered proliferation of credit and debt instrument "engineering" that has gone on. Most people understand by now that we are not rescuing "mortgages" or "banks" or "AIG" or "Fannie" with these bailouts: We are rescuing large-scale credit structures, the opacity of which blindsided the financial system. The continued opacity, upon near-vaporization of these entities, has, upon closer examination, resulted in all these "come to Jesus" moments all over the financial system. It has been a FINANCIAL phenomenon, not (until recently) an ECONOMIC phenom.
I'm not a big fan of assigning "blame" per se, nor am I a big fan of regulation. But the single element of regulation that would have prevented CC would have been the placement of the default swaps and debt arrangements so plaging us now on transparent exchanges operated by a third party...EXACTLY how the stock, options, and comodities markets run today. In those markets, a neutral third party (the "exchange") is guarantor of the integrity of the arrangement and thus is mightily interested in the ability of both sides to perform. You exceed your margin requirements in a trade, accidentally or on purpose, you find out about it very quickly and act or get sold out, and I mean right now. It's just that simple. The amount of money involved in these bailouts so far would probably be enough to pay off the FACE VALUE of every mortgage in America! That's why it is not, IMO, really a mortgage problem, it's a default swap problem. No, what we are doing is bailing out the folks who levered these arrangements/contracts up 30, 50, or 80 times their face value. The threat, and it is unquestionably a serious threat, is that there simply isn't anything to hock against 30 times the value of every mortgage written or refi'ed and every leveraged buyout and every 3-year-no-payment mattress deal sold since 2005. That there isn't backing for such a credit expansion; that so many deals were written so grossly exceeding the "mother" counterparties' ability to perform [AIG, FNM, FRE et al] is PRECISELY the item that has destroyed trust in the system and has made even the strongest lenders unwilling to lend. Because there is simply no transparency out there, and every opportunity has apparently been taken to game the system and to sell bunko paper. Hank Paulson and the "strategy shift du jour" hasn't helped either. Quite simply, TRUST has been destroyed.
Quite simply, TRUST has been destroyed.
Still, I see that as a government failure. Where did these instruments originate? In mortgages. The ability to trust that basic instrument was gutted by ‘lets roll the dice on this’ Barney Frank and most popular contribution receiver Christopher Dodd. If I’m a bank that has been forced/encouraged to make a risky loan, I am going to treat it like a hot potato, bundle it up with a few others and get it off my books. Would setting up the trading exchange you describe not have been in opposition to the socialist goal of placing everyone in mansions?