Breeze: Yet another post filled with hot air and yet another post showing that your moniker is truly apt.
The market hasn’t made any determination as to the value of the assets in question and that’s the crux of the problem: Institutions aren’t lending because they don’t know who is holding what assets, bad or good. Thus, the credit market froze.
As to Bernanke being an idiot: While I don’t agree with some of his policies on principle, I also accept that complete systemic failure is a far worse ill than currency devaluation at present. The notion that he’s simply another Old Boy protecting his Wall Street kin is laughable and for the reason it isn’t true. His background is academia, not Wall Street, and his efforts have been laudable for a couple of different reasons: (1) He’s handling a mess he didn’t create (that would be Greenspan) and (2) He’s moved with remarkable speed and vigor, especially in terms of creating programs, creating excess liquidity and trying to kick start banking and credit.
Are these programs a good idea over the long haul? No. Are they necessary in the short-term because of the severity of the situation? Absolutely. In order for us to get to a long-term, we need to do something in the short-term and something with force and speed behind it.
You contradict yourself by talking about a “massive misallocation of capital”. How do you think capital gets allocated? Through banking. If banking and credit are frozen, then what? Banking, by necessity, needs to get fixed first and fast.
As far as AIG and similar players: The notional value of the derivatives market is $600Trn (yeah, trillion). AIG is positioned, along with other key players, right in the middle, in terms of how large their derivatives portfolio is. If they crash, then their leveraged derivatives position crashes as well, creating a massive ripple effect and possibly systemic failure. Or, what we balance sheet reading accountants refer to as a Bad Thing.
