I never really believed the Fed people understood the severity of the housing market decline and don't believe the underlying cause: too many adverse risks being allowed to enter the general housing market (ie, subprime, barely documented income, etc). These people have paid-up houses or strictly prime loans. Subprime experience is simply not part of their life.

But inflation is, which is what the Fed was primed to fight. Whether the inflation reports indicated increased inflation or not, Bernanke & Co. knew it was only a matter of time; whenever energy costs increase so must the cost of everything else. Even bernanke, whether he pumps his own gas or not, has to drive by gas stations on his way to work and see the price quotes.

BTW, the increased BK filings may simply go hand-in-hand with increased foreclosure and not be a problem in of themselves. Even after the 2005 law changes, anyone could still file BK--they just would have tro do the Chapter 13 as they could not qualify for the 7 without throwing the house into it, so so most people there was no reason to file at all. Now, however, if the mortgage payment is the problem, well, if you had an adjustable subprime loan, chances are ytou can't afford it and you'll automatically qualify for the 7! Remember, the 2005 changes were designed to protect credit card companies, not mortgagees.

The noise level here is amazing. Let's clarify some things here.

1. "RIsk laundering": Transfer of risk is CRUCIAL to a modern economy. "Risk transfer" is the Insurance 101 definition of insurance itself. Without reinsurers spreading out financial risks lending, investment and the economy itself would collapse. Of course, the risk has to be quantified, disclosed clearly and truthfully to be a risk worth insuring. In the subprime sector, lenders and the investors backing them created products without a track record to indicate probable performance; never before had anyone lent out purchase money to someone with a 580 FICO score (and the lousy credit record to go with it) without verifying ability to repay the loan, at 100% LTV, with a 6% margin kicking in after 2 years. I don't know why someone would think, without actuarial proof, that was a good risk, but someone did. And these deals were sold, packaged into MBS pools and became the basis for a good part of hedge funds' portfolios.

We now know, of course, that these pools were not close to worth their stated value, but someone said they were. The culprit here seems to be misrepresentation, not the use of MBS or derivatives or anything else. What is now needed is transparency, not elimination.

2. The idea that we should have let BS collapse, and that basic capitalism's tenets are betrayed by this bailout, is preposterous. The situation went from bad to worse within hours, not days, and if nothing had been done we might be looking not just at BS' collapse but maybe Chase, or Citi, or JPMorgan, or Mellon as well. The crash of 1929 happened precisely due to a domino effect, and the disaster took a world war to get out of. Frankly, the Fed guaranteeing (not giving, but guaranteeing) $29B to cover BS' possible losses to JPM is a small price to pay for stopping the domino chain.

These investment companies and their forerunners are the engine of American growth and prosperity for over two centuries. The provide jobs directly and indirectly to literally millions of workers.

What needs to be done going forward is greater transparency of risk being sold.

Iraq IS the economy. Or, rather, where the money to fund our economy is going.

Spreading risk as wide as possible is a sound idea and works just fine, Andrew--so long as the risks insured are understood well and priced properly. The idea really is like ebola when that risk is poorly understood and underpriced. This is why life insurance companies, who have been working with mortality for 100+ years very closely, consistently make money in life insurance. Mortality among a general population sector is very well understood as a risk.

Again, hundreds of billions of dollars worth of subprime loan products were underpriced with no track record of performance. However they were priced, the results were badly out of joint with the prospectus. When that bad risk is spread throughout the investment world, it really does--and scientifically, should--act like a plague virus.

Look at it this way: arguing AGAINST spreading the risks goes against the mathematical principle of the law of large numbers. Make the argument if you please, but you're arguing against math. Now, if you don't believe in math, I can put you in touch with the local Flat Earth Society people in your area.

When risk is dispersed in mortgages, profits are actually reduced because the issuing lender either a) buys insurance for the mortgage paid annually; or, more often since insurance is less available, transfer ownership and/or servicing rights to one of two different organizations.

For example, the issuing lender might only make a one time fee of 1-2% origination. The purchasing lender makes the interest on the loan, from which they pay a servicing company a fee to send the bill out every month and collect. The holding lender then might package the loan with thousands of others like it and register them as MBS with a commercial underwriter, spreading risk around the system like a spoonful of peanut butter over a giant cracker (say, a matzoh). The problem comes in when a) the peanut butter has biotoxins in it, and b) so many of these loans have been issued that the peanut butter is now an inch thick, guaranteeing that every bite is covered in poison. Yumm.