It is a mess. After a bubble up like this, with all its stupidity and recklessness — and its innocent victims being sucked in thinking it was all real, as well — now we’re at an inflection point.

And, that’s not new. Only the size of it is new with the details unprecedented in scope and rot.

The only question that is outstanding so far as I’m concerned is, will the central banks get away with another attempt to float the bubble’s consequences away. Unfortunately, the proper analogy is more along the lines of giving an addict more junk to help him get back up on his feet when he slips into a very ugly withdrawal. Eventually the addict can’t get enough and his body gives out. With each inflationary response to a bust — from the savings and loan bailout, the Mexico, to LTCM / Russia default, to the dot com tech bust, to recession 2001, etc., the distortions grow more and more perverse.

We’re only in the early innings.

Oh, and you definitely get the gig of too big to fail. Every time this happens, the same big banks who earned obscene profits while creating / enabling the bubble then get their returns guaranteed by inflation of the money supply. The name of the game, some say, is bailout — by design. Note: They always make sure the middle class stands to lose a lot when these things break, and the politicians make sure the people get what they want.

The too-big-to-fail theory is creating a tax on everyone by inflating the currency.

What is the alternative? Let them fail? It doesn’t seem that bad: It’s not as if all the money flowing through, say, Citibank will suddenly vanish. The viable parts will be bought by someone and the non-viable parts will what?

This sort of macro/micro economics intersection is very confusing to me.

Presumably someone is going to be left holding a giant pile of defaulted loans. Depending on the number of someones and the size of the pile, this could be the start of a cascade (if the number is small and the size is large) or just a minor blip (the number is large and the size is small). Does anyone know?

The foreign inflows seem like a good thing to me: We buy Chinese stuff and they put the money back into America to cover our credit defaults, which were created by buying their stuff. I cannot imagine why they are doing it except to keep the circle going (and a couple billion are a drop-in-the-bucket to the Chinese government).

That may be a worthwhile (i.e. self-interested) goal in and of itself: Holding that much US debt, it is in their best interest to keep us solvent enough that we have a prayer of repaying it.