Bill Laggner and George Karahalios on the credit bubble's great unwind

To many it seemed preposterous to suggest that a credit crunch could prevail in a world flushed with liquidity. Thus, when the recent sub-prime loan fiasco materialized, authorities assured the masses that it was “contained” to a fraction of the overall mortgage market. As the contagion spread and claimed a few levered hedge funds, central bankers deemed this to be a necessary purging of weak hands which they welcomed. Finally, when a few of the “fringe” lenders responsible for the most risky of loans declared bankruptcy and the domestic equity markets held relatively firm, many believed that the worst of the crisis had passed. Instead, a global run on the banks ensued, not by depositors, rather by bankers themselves who no longer felt comfortable lending money to their peers at the discounted rate decreed by their respective governments. So in a world of allegedly ample credit, central banks were forced to infuse even more liquidity to maintain their already low short term interest rates and to prevent the imminent unwinding of the credit bubble. In a debt-laden U.S. economy dependent on asset price appreciation, even a government bureaucrat comprehends the importance of protecting the collateral by forestalling its liquidation.

~ Bill Laggner with George Karahalios, Bearing Asset Management, "Collateral Damage: The Inevitable Unwinding of 'Assets' and the Impending Governmental Intervention," Financial Sense, October 18, 2007