The Real Cause of the Credit Freeze?

[socca]

Originally Posted by . . . Yrs to Go

A financial system without derivatives, hmmmm. Calls are derivatives. So are callable bonds. So are forward commodity contracts. As are interest rate swaps. And . . .

OK, to be more exact, without the type of unregulated derivatives that got us into this mess. The details of what to permit/exclude and how to regulate what is permitted can be left to the experts.

The bailout/rescue mental model looks hopeless to me until the Fed/Treasury can (1) accurately quantify total taxpayer liability for the 'toxic assets', and (2) convince investors that we can and should actually bear this liability.

The dual financial system mental model (one 'clean', one 'dirty') appears far superior to me. How would it work, and how would the 'clean' financial system relate to the 'dirty' financial system? Don't ask me - another thing for the experts. Too bad I'm not an economist - it would be a fun project to work on.