I wish I knew what mental model to apply to the bailout. When Treasury begins purchasing toxic assets, are we propping up an existing tottering credit derivative Ponzi scheme by becoming a buyer of last resort? Or, has the Ponzi scheme already collapsed, and we are just cleaning up the aftermath? Or, are we hoping to bring down the Ponzi scheme in a 'controlled implosion' rather than suffer the aftermath of an uncontrolled explosion? Getting the mental model correct would help me estimate the risks to the economy going forward.
Great way of putting this, socca.. I would have to ask something at another level: whether the players actually recognize the Ponzi scheme in the first place, and if so, to what degree? Not just the financial sector guys, but politicians and regulators, as well.
I'm not convinced there is anything that can be "done", but I know what you mean about wanting to have an idea of which way the bricks and beams are gonna fall. And whether the people intervening have the capacity of those engineers that implode Las Vegas hotels. I strongly doubt that.
I am in no way heartened by anyone who claims that this market also won't/can't/shouldn't also blow up. We've had plenty of assurances during the housing bubble and MBS debacle that that would never have general adverse effects, either.
The Gramm/Greenspan ideology is that these are private contracts.. and why should governments be sticking their noses in with capital requirements?, etc. (like with a regular insurance company). Seems like the reason for the huge boom in swaps is because a lot of money could be made exactly because
no one was paying attention to how, or whether it was safe.. you can just sit and collect your "premium" but when your bet goes bad there is nothing to back it up. Free income while it lasts.
In the world of the lumpen, this would be called insurance fraud and you or I would go to jail for it.
In the legal sphere, aren't there just some contracts that are unenforceable? Like, if you -socca- promise to give me 100 gazillion dollars if Starbucks goes bankrupt, and then Starbucks goes bankrupt.. am I gonna collect on that? Of course not.
Probably naive and unworkable on a global scale, but these things should all be immediately halted, made illegal, and unwound.. everyone turn their cards over at the same time and then re-set. Take the loaded weapons out of the hands of the small children.
This is just another instance of there being no actual money behind the curtain. Your mere promise to give me 100 gazillion dollars conjures up a phantasm of "worth".. of some kind of "asset".