As you say they're bailing out the rich, and letting the poor and middle class sink... again. Even Clinton's 1 billion mortgage plan is far too little (and will be far too late if it ever occurs). We've got to get off the Arab blackmail train - and we've got to stop coddling the rich.

And I confess that it's getting to the point where even though I know easing is part of the answer, I'd almost rather do a Hoover than bail the rich out yet again. Cutting off my nose to spite my face? Perhaps. But it seems to be a choice between getting slow roasted or dumped into the fire, and I think I'd like to get it over with.

Somehow I just don't think it is in the cards yet. The populace just doesn't "get it" yet, they still think all income taxes are bad regardless of wealth status. It'll take a few more briges falling down IMHO before they start to wake up.

Welcome to the Great Depression of 2010 ;)

" Or is this unwinding driven by a sudden risk aversion?"

http://mauberly.blogspot.com/

What we are seeing is the result of uncertainty, which increases risk aversion, especially at tipping points. We are at a tipping point in the global markets because of lack of transparency that is causing the uncertainty. Easy money leads to imprudent assumption risk on the premise that one can always borrow to cover oneself. This is sustainable as long as asset prices rise and core inflation is contained, so that asset increases are not attributable to inflation. However, when inflation starts to rise, as it has when housing, energy and food are figured in, although they are excluded from core inflation, then the game is running out. In addition, when even the little guy is getting into the action (subprime mortgages, RE speculation), the game is beginning to run its course. Through in the securitization of debt through derivatives, and the entrance of private equity and hedge funds as major players, and the game gets very opaque, since these players are not required to be transparent. The icing on the cake is the huge leverage involved, which puts even the big money and the deepest pockets at risk.

At a tipping point such as this, the uncertainty becomes too great for the game to be sustainable, and almost unlimited appetite for risk turns into risk aversion. Then, liquidity becomes an issue as players seek to cover their positions and there are more sellers than buyers. At this point the house of cards will collapse unless the central bank step in and provide liquidity. However, if they do, they not only reward moral hazard, but they create it. What this means is that there is little or no check on markets owing to risk, because everyone knows that there will be a bailout.

As a result, instead of the necessary correction to shake out weak hands and restore market equilibrium, the game continues until until another level of unsustainability is reached, and so on -- until this cycle itself becomes unsustainable. For example, at some point, the central bank's unrelenting printing of mony results in a currency crisis, hyperinflation, etc. or the little guy gets so squeezed that the "real" i.e., non-financial markets contract for lack of buying power. The latter is one issue, since the US consumers who are driving the world economy are seriously overstretched by increasing debt and inflation of necessities, along with declining real wages. Not only is there no relief in sight, but also the system that is loaded against them.

When this happens, the tipping point may become a turning point, where unexpected consequences of moral hazard (read greed and false expectations about risk assumption leading to extreme imprudence) manifests in real world consequences that the central banks cannot adequately control without even worse consequences. Then the usual market correction becomes a change of direction from bull to bear. Whether we are there yet is to be determined and the markets will likely be testing support levels.

However, these consequences may become catastrophic, as they could be at the end of this cycle, either presently or in the not too distant future. Then, a transformation takes place that involves a rethinking of responsibility (fiscal and monetary policy, and regulation). If it is serious enough, political and social transformation, as in post-Weimar Germany and the US during the Great Depression. It can be argued that the US and the world are approaching just such a tipping point, with the effects of globalization, "tough energy," US imperialism and dollar hegemony, the indebtedness of the US and the US consumer, lack of transparency in private equity and hedge funds, the necessity to tackle global warming, and other factors now converging. This is likely coming before 2012, it matters greatly who gets nominated and wins the next election.

is leverage and a rising market.

JKG.

Actually this isn't sudden risk aversion, it's sudden belief by a number of parties that a nash equilibrium is decaying.