[quote=arraya]
At the end of the day, if every counterparty is bad then you don’t have a market and you don’t have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won’t give it to him. That means he can’t ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN’T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.[/quote]

This confuses me a bit. Couldn’t this be solved by some type of escrow system where actual cash money is put into an account and the cash is released when the goods are delivered? Why would a bank have to be involved at all for this type of transaction? To me, this seems more like a trust problem than an actual “credit” problem.

It seems like someone could make some decent money by starting up an escrow company that does these types of transactions for a fee. This would likely increase the cost of the transaction, but I don’t see why the whole world would have to shut down just because one insolvent bank refuses to lend to another insolvent bank.

Instead of trying to bail out the existing commercial paper market, which is probably chock full of derivatives of crappy mortgages which have been sliced into two-month or whatever term chunks, the solution is to start a new market with good paper. Let the old commercial paper market burn as it is full of junk.