I am not claiming that institutions insured their own securities. I don't have to make such a claim. Only that lots of institutions were holding and accumulating risk (risky assets, risky loans insurance for such loans, or counterparty to CDS bets ). Yet these same institutions are those who muct make good on THE promise that underpins the entire shadow banking system and the exchangeability/worth of the securities – namely that no one will ever be saddled with a securitiy that they cannot echange/sell. No one wants to accept a piece of currency and then find people won't accept it as payment. The promise has to hold. If it doesn't, if people think to themselves – I don't want to accept any more of this stuff, because I know from my own holdings how dodgey it is. At that point the securities cease to be exchageable currency and the mnarkets stops. Doesn't slow down. Just stops. AS it did.

Lehman had billions of securities but no one would accept them. The interbank lending system froze. Lehman suddenly had no assets they could sell. The system fell over.

I am advancing a 'way of seeing' what went on different from other 'ways of seeing it'. Both can map on to0 the events. I believe my way shows more closely what happened and why. It also, I claim, makes it clearer what is at stake and the folly of attemtps to 'fix' the system.

A currency has imploded. All the assets denominated in that currency have and are still devaluing. We have massive on-going deflation.

In one currency. The Securitized one. We could have infaltion in the other, sovereign currency. Now that thought cannot even occur in the other way of seeing what has happened.

Please remeber I am thinking this stuff out as well. I am offering these as thoughts not as truths.

Thinking this all through for ourselves, NOT simply accepting receeived wisdoms, is what we all need to do.

For myself, I never bought anything I could not pay for immediately. I am lucky I know and a lot of folk are living from hand to mouth with high property (rents and mortgage). I sympathise and we will see how the ordinary people wil pay (literally) for all this.

Please do not let me disturb you in completing your magnum opus, but if you can expand on:

"It’s not as if there were two different groups of people. Over here, the people accumulating the risk. Over there, the people whose willingness and ability to buy WAS the market’s promise and guarantee of liquidity"

What permits this observation, this statement of fact? The "raw" data behind? If you get my meaning…

For instance in the case of AIG (insurer), were they also creditors/owners of debt they had insured? I was rather under the impression that they had simply gravely misjudged the % of defaults on loans and and the value of collateral, making it impossible to make good on their written insurance…

And in the case of regular financial instutions, they were the first to catch on to (in the outer trenches of credit-life, as they are handling forclosures) the massive claims that were in the process of being filed against insurers, and they lost confidence that the insurance would be able make up the losses on loans that now were being held in the shadow banking system ?

The shadow banking system had access to liquidity only through ordinary banks (not CB), which they were denied in view of the the heavy losses the banks knew they would suffer on the loans ( possible insolvency). So, they began to tumble…

Because of uncertainty about where those losses would end up finally, possibly with some of the banks themselves, interbank lending dried up when it dawned on them that the counterparty bank could be insolvent depending on its involvement in the sub-prime market.

Tri-partite, I think: Bank, insurance company and "shadow bank" in a "Danse Macabre"

That's how I read the FED-paper: The shadow banking system gained access to CB-funding in the autumn 2008 through black-mail …or else: There would not be any more money in the ATM

The financial players are ina win/win situation. Things really do improve they profit. Things get worse, they get another round of free money and make a profit. What's not to like?

This is the situation they lobbied for. It is the situation our governments agreed to.

It was clear as day 18 months ago at least that this is what would happen and it has. NO ONE can say it was unforseen.

I cannot resist quoting this piece of financial logic behind rising markets today:

“It’s a sign of how long this crisis has been reverberating around that we now enter a week that could see fresh quantitative easing from the Fed,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a report. “Bad news is interpreted as increasing the probability of imminent QE, a kind of win-win for risk assets.”

I repeat: “Bad news is interpreted as increasing the probability of imminent QE, a kind of win-win for risk assets.”

Who is crazy here? The markets for being moved by such motives, Mr. Reid for imputing such motives on the market, or the Fed for giving in to financial black-mail (again)?

I note that Mr. Reid is not referred to as an economist, but as "strategist". So I guess he's not describing something actual, but rather making the case for QE to serve DB or it's customers interests.

Then again, the distinction has been blurred for a long time.

http://www.propublica.org/article/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going