KK I agree with your post completely other than your assertion that this problem has nothing to do with government.

You seem to be a smart fella. Why you fail to see the moral hazards created by government policy is completely beyond me.

You mention derivitives, or more easily explained as insurance, or a bet if you will. If I am Goldman Sachs and I want to hedge a position I have with say,....GM corporate bonds. I can go to AIG and ask to buy insurance on my position with GM. AIG will charge me a premium for the insurance and I will get paid the full face value of of the bond should GM default. Sounds OK on it's face right? Well here's the kicker. I don't have to own a position in GM corporate bonds to buy the insurance. Here's another even bigger kicker. AIG doens't need to have the money on hand to pay me should GM default. So who's on the hook then? The taxpayer is.

What's this have to do government? That's just the evil free market working the way it's supposed to right? Wrong. Simple fraud laws and the SEC doing their job would have kept this in check. Let us not forget either the repeal of Glass-Steagall and Summers and Geithner advocating successfully for the raising of leverage limits. Companies were allowed to leverage themselves to critical positions at the behest of the federal government. Community Reinvestment Act rules engaged banks in subprime lending as a matter of policy. Banks were required by the government to raise debt to income levels required for loan acceptance. Required to approve applicants with lower credit scores and required to lend on collateral that was located in less than satisfactory regions. Ratings agencies knowingly falsly rated the associated MBS and CDO's, all under the nose of the SEC. Once the game was rigged and secondary markets in place with an endless pipeline of low interest Federal Reserve money to grease the skids it was all over. Smaller more prudent banks were forced to either join in the madness or get run over by the train.

You are right though. We are seeing a complete restructuring of economies world-wide. What this restructuring will lead to is a significant drop in the standard of living for middle class people worldwide, including the US. Third world countries will continue to suffer under IMF/World Bank loans and their austerity measures. First and second world nations will be forced into the same rat trap to get out from under their massive debt obligations. It will be decades until we see 5-7% unemployment again. The jobs lost this time around are gone for good. It's funny you site these things yet still believe that a "flight to quality" is going to save our debt crisis. If America is going to have to restructure and unemployment remain high just exactly do we keep that AAA rating again? Maybe I should ask Mr. Geithner that question in 5-10 years.

All is an example of the abject failure of fractional reserve banking and the Keynesian model. Not a failure of the free market as I would assume you would trumpet. This country has had anything but a free market for the last 100 years. Soft facism or cronyism is more like it.