Daily Transom – by HFM – New York Observer - Crises have a way of overthrowing old verities. The recent stresses affecting Europe reflect growing doubts about some heretofore settled ideas concerning credibility. Sovereign credibility was essential to stemming the first wave of the crisis. But past credibility may prove a root of future vulnerability. And the sovereigns that until recently lacked credibility-the emerging markets-may be thankful they did.

In hindsight, it has become clear that several aspects of the 2008 crash had as much to do with credibility as with fundamentals. The rottenness of a significant fraction of American mortgages was fundamental, as was crazy leverage and positioning at Fannie, Freddie, Lehman and AIG-time has done nothing to change that truth. But back in 2008, the inferno of panic burned much more broadly. The entire banking system teetered, the commercial paper market ground to a halt, money market funds faced runs. The government contained the flames by creating a fire break out of its own credibility: the F.D.I.C. money market guarantee program, the Fed's commercial paper purchase program, the TARP's capital purchase program and associated stress tests (backed up by the promise of more government support).

Link to entire story: http://www.observer.com/2010/daily-transom/going-mattresses