Misdirected Credit Runs Unabated

When I titled last week’s piece “Too Big to Suffer a Loss” I had no real inkling of what the past week would have in store. Actually, I had presumed that the Treasury and Fed wouldn’t allow Lehman to fail. Lehman Brothers, after all, was one of the major players in the precarious daisy chain of Wall Street risk intermediation. A failure by any key player in this realm would immediately have this historic Credit Crisis jumping the firebreak from the rugged terrain of mortgages and “risk assets” into the hallowed land of perceived safe and liquid contemporary “money.” The consequences of such a lurid escalation were potentially so catastrophic that I believed Hank Paulson and Ben Bernanke were prepared to use the overwhelming force of fleets of aerial supertankers to ensure our “money” tinderbox was not set ablaze.

It now appears they didn’t appreciate the ramifications for Lehman going under – how this would quickly ignite a run on the core of our monetary system. It wasn’t long, however, before the horror of watching the entire system going up in flames prompted a mad scramble to conjure the equivalent of monetary firefighting "Shock and Awe". What an incredible week.

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