The world's "lending machines"are frozen

"The introduction of CDS (credit default swaps) coincided with a favorable economic climate for creditors and debtors. Since the nadir of the last credit cycle in 2002, creditors had a uniformly positive lending experience with virtually no defaults. The CDS market blossomed and the issuance of credit expanded, untethered by considerations of risk. From a modest infancy, the notional value of CDS today surpasses the amount of underlying cash bonds by an order of magnitude. CDS contracts now total $45.5 trillion of outstanding credit risk, growing at an amazing nine-fold in the last three years alone. Putting such a large number in some perspective, $45 trillion is almost five times the US national debt and more than three times US Gross National Product."

The US and the world is facing an almost unbelievable problem. Nobody knows what type or quality of risk they own. This has put a huge HALT to lending. Talk of another Fed rate cut this month sounds heartening. But a rate cut has nothing to do with solving the basic problem. The fact is that the US and the world's "lending machines"are frozen. The credit risk is now so huge that it's almost beyond comprehension.