Calculated Risk sums up in a few brief sentences what the precise problem is. Only people who truly understand the problem can make it this clear.
The credit markets are in severe distress and we can see evidence of this in the various credit spreads.
A number of financial institutions made bad decisions, and they now need to deleverage. For the most part these institutions can’t raise private capital, and as a result they have all but stopped lending. Given a little time, this lack of lending to credit worthy borrowers will significantly impact the real economy.
Jim Cramer of TheStreet.com has a useful explanation of the current “black holes” in the markets. While he may be a tireless cheerleader for the bailout and investment banks, he pulls no punches in detailing the greed and stupidity that led to the cratering of Lehman, AIG, WaMu, Fannie and Freddie – with Citi, GM, and Ford now waiting in the wings.
Really I only regard Citigroup as an issue as GM and Ford will get more lifelines as they are too politically powerful. Still, the lesson here is one of colossal stupidity by all involved and shameful executives, regulators and federal officials are all in their jobs, being ineffectual as the apocalypse breaks loose right now.