This crisis is summed up by one word, “trust.”
You cannot have a market without trust. What is credit? It is trust that you will get the money back from the person you lent it to.
With Credit Default Swaps, what happens to trust? It became irrelevant. Who cares if the person defaults, I’ve pawned that risk off to some other poor sucker, who cares, I got mine. And then the next person pawns it off, and so on..until inevitably, somebody ends up holding the bag.
But the problem is, that in this case, inevitably everybody wound up holding the bag, because the assessment of risk got so darned tangled. Remember the Russian quote, that Reagan used to say, “Trust, but verify.” How now can you verify? So if you cannot verify, you cannot trust, and then markets break down. Re-establishing trust is the only thing that will get us out of this mess, not government stimulus plans and bailouts, and pumping even more fiat money into the system. As Seinfeld would say, “Good luck with all that.”
“Re-establishing trust is the only thing that will get us out of this mess, not government stimulus plans and bailouts, and pumping even more fiat money into the system.”
And we reestablish trust with the thieves who did this in first place just how? So far as I can see, all the big crooked operations have to fail, their leaders from Asst. VP on up have to be sacked and at least a few need to go to jail for a long time. In the meantime, the whole house of cards comes down unless the stimulus works. Politics aside, we’d better hope it does because there’s no other game in town for the majority of Amereicans.