I don’t think anyone has really. I suspect that is most of the problem. As I understand it the idea was to spread risk on loans throughout the financial system so that when something went wrong it was so dispersed that it didn’t bring down big players and could be contained.

The trouble is that this was perceived as lowering the risk, and that along with the easy liquidity being liberally sloshed around the world and low interest rates (to encourage growth after 911) it encouraged reckless lending. This reckless lending has now, rather inevitably, proved to have been a bad move.

At this point, if things were playing by the old rules, a few banks would go under, lots of mortgage companies would go under, we would all suffer a bit for a couple of years and people would eventually get over it.

The thing that has people running for the most secure form of cash is that because of the spread of the bad risk, nobody quite know who has lost how much. You could be holding stick that is going to tank instantly if it turns out that its CDO (Or, God help us CDO squared) is made up of bad debt. But it may not.

So you aren’t alone. The market is flustered because everyone is trying to make the best moves in the dark. That’s why, rather than seeing the whole thing go down, you are seeing these big drops, followed by liquidity injections, followed by rallies. The day starts with everyone being scared and running for their security blanket, then daddy turns up and gives everyone a big cuddle and makes them feel that maybe it is going to be alright, then smart people think “Hey it went down but it didn’t have to, I should buy!” and up it goes again.

Nobody’s tried this before you see, it is a new phenomenon. I’m a grouch so I think that, ultimately, the fiction is going to fall to pieces and we’ll be in a godawful sitution. Money these days, as far as I can tell, is entirely hallucinatory. The thing that probably makes me wrong is that it in in the interests of everybody in the entire system to pretend that the Emperor’s clothes are lovely. If everyone dreams the same dreams at the same time, maybe it all hold together.

Or we could be in for a hell of a credit crunh / inlationary spiral that is out of control of everyone.

“Whatever Chairman of the Fed Ben Bernanke does, I sure hope he acts quickly and that whatever his prescription is, works.”

So does he, I suspect. He’s only really got one option available to him, keep pouring liquidity into the system and hope that it bouys it up. Good luck to him.

These people need to decide whether we have a “free market” or not. When profits are to be made, it’s all private. When losses arise, well it’s socialism to the max and we all have to chip in to bail out Larry’s friends.

Stocks fell sharply Thursday after investors were shaken by problems at Countrywide Financial Corp. …