It is good to see that the immediate liquidity difficulties appear to have reduced...for now.  But rates on LIBOR are still relatively high, and the mortgage market is facing tremendous constriction outside of conforming paper.  Also, the leveraged financing market has really seized up, and that does not look to get any better soon.  There are probably other problems, as evidenced by various other problems here and there. 

But maybe this is all just a rough patch, and in a month or two everything will be back to normal.  Me, I don't think so.  The excesses of this cycle have just begun to be unwound.  Whether it leads to economic stagnation or recession, I don't know.  But I do believe we are not done yet.  In all the years I have been involved in managing credit risk, I have never seen such bizarre excesses, and a complete insistence that credit risk has been practically banished.  It hasn't. 

I thought awhile about posting the link to this article, because the title is unnecessarily sensationalistic.  But I decided to put it up anyway, because I consider it an excellent primer on what is going on in the credit markets today.  I highly recommend you read it, and decide for yourself if...We are headed for an epic recession.

The interviewee, Satyajit Das, has written an outstandingly cynical and informative book titled Traders Guns and Money

His thesis is that credit modeling and derivatives are used as a gimmick by investment bankers to filch money from all comers.  The models underlying all this, and the products provide a false sense of control, which is one of the major reasons we have very high levels of leverage today.  I do not think this means that all models are bad, or that derivatives are evil.  Its just that the vast majority of customers are in such a state of awe in the face of this "financial engineering", they cannot ask the hard questions they should.  I do believe that is problem enough. 

I will end with an excerpt from the above article, which I agree with completely:

"Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he (Mr. Das) points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed."

The consequences of these things...we have a way to go before they are all manifested.