Either way, it will affect counter-parties down the chain. The problem with the CDS market is that it is so intertwined. There are literally bets upon bets upon bets. When Paulson affects the Mark to Market price of an asset then everything will be thrown off kilter and it will be felt throughout the world's financial systems.
I get it. So then, wtf is there to do? The option of going into a depression is, I think, wishful thinking. I think it would be much worse as, at that time, the global downturn didn’t provide for any foreign capital to start soaking up American assets. This time would be different—China could, for instance, buy up a significant part of the Financial sector, as could a handful of Arab states. Neither prospect sounds good to me; I’d rather that if the whole thing collapses, we take down the rest of the world with us rather than leave our enemies standing, ready to devour what’s left.
I am willing to bite the bullet and let the Fed do this thing, only with assurances that it will have strict rules on which assets will be absorbed (i.e., only the strongest of the weak, so to speak) and that any profits that might materialize down the road will be returned to taxpayers directly, rather than the black-hole of the general fund. I also like some of Gingrich’s suggestions.