I generally agree with what you're saying there -- and this time the motivation for managing rates back down is being particularly driven by the need to re-liquify the banks to save their butts, rather than just the usual routine delivery of more firewood to the speculators to build an even bigger bonfire.
It is interesting to note that aside from mortgage losses, the current need for the banks to backstop the CP market and also honor their previous LBO commitments is straining bank balance sheets here, and right at a time when a lot of SIVs and other exotics are getting pushed back onto the banks' books like so many bastard children in wicker baskets showing up on the front doorstep.
I think the jury is still out on whether we've seen all the warts yet -- IMO a lot of financial institutions (large and small) all over the planet likely qualify for "dead man walking" status, and are only carrying on because they have not yet marked the asset sides of their balance sheets down to market -- their malinvestments therefore remain trapped there, marked to model or even par. While these entities can still function as long as 'cash in' covers 'cash out', they won't be making much if any money, and they sure won't be growing, because they don't really have any capital -- nor can they peddle their bad overvalued assets off to anybody else and solve their problem that way.
So these "dead man walking" vehicles just carry on and hope that something happens they can use to rectify the situation before anybody finds out. This is precisely why short-term interbank lending rates are rising -- everybody knows that there are still a lot of bad apples out there, but nobody knows for sure who it is, although whoever is offering the best rates to pull in deposits might be viewed as a pretty good candidate (I'll let you do your own homework on that one). It's not the stuff of a strong financial infrastructure.
Now imagine the ironic example of a corporation that finds itself in need of assistance from its banker(s) (e.g. because maybe it can't roll over its CP), only to find that their bank has been less than forthcoming with their own disclosures and is in even worse shape than the customer. With most other corporations and banks out there in the same mess needing to take care of themselves, our two boys have nowhere to turn and both end up going down in flames.
Now I don't know what the next trigger will be, but it seems logical and even inevitable to me that at some point we are going to experience another credit upheaval event, at which point I expect to see another 'wave of discovery' of the insolvency or near insolvency of a lot of these weak sisters.
FWIW some people believe there will be a run of redemption requests in the Quant sector at the first of October by those investors who didn't make the last deadline (because the Quant trouble came to light mostly after Aug 15th) -- a run on the Quants would not be good.
And there are still troubles in certain corners of the commercial paper market, including in the form of (a) existing paper that may not be able to be rolled when it comes due for a lack of lender interest (meaning you'll have to collateralize something else assuming you have it, or you'll have to sell something) and also (b) the impact of now uncollectable receivables that were previously pledged against existing commercial paper (meaning that since some of the people you thought were going to pay you have gone bye-bye in the meantime, your CP isn't worth as much as it was when you first issued it, so your CP isn't going to roll at face value even if you could renew it, yet you still have to retire your existing loans in full or be in default yourself.)
Meanwhile, the rating agencies are also slowly but surely downgrading the entire credit universe, constantly raising the overall cost of borrowing in the process for weaker borrowers and also lessening their prospects of all forms of debt renewal -- so as the due dates for any/all of these existing scheduled obligations approach, something's got to give somewhere, i.e. somebody will not find funding and will have to start liquidating their assets, and that's when the snowball will start moving down the hill again.
Whatever the trigger event ends up being, the theory follows that any renewed forced selling of assets will also further erode the shakiness of any bogus valuations still out there. As credit facilities get withdrawn, this will flush out those who then become exposed as not having enough tangible assets to liquidate to repay their debt, despite what their financials were saying (i.e. assets marked to model instead of reality).
Depending on the severity and size of the liquidations and the losses incurred on any uncollected debt, the selling may lead to even lower valuations for everyone, aggravating the cycle. Because Idiot Bookcooker A couldn't pay B, B now can't pay C, who in turn can't pay D, and so on -- at the end of the day, even the good guys get screwed.
Very depressing. Hope it doesn't happen. But not betting that it won't or can't
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