Cash Flow & liquidity

Like everyone, I really wish that I could cook up an answer to this mess. Could it possibly be as simple as reversing the lack of liquidity?

Let me explain: mortgage assets are held by the most important financial institutions in the world. Those assets stopped providing the cash flow that was necessary for their holders to pay the carrying costs associated with keeping those assets on the books. When the first few holders got out, asset prices began to fall, this started a downward spiral in asset valuation, this started a mark-to-market call for more collateral or lower advance rates which caused more selling and here we are. The fed tried to step in and provide cash flow, but the problem was greatly compounded by an institutional slamming on of the brakes.

Now we seem to be in a situation where liquidity is in the system, but the banks are either not lending, or companies are not borrowing. Either way, the economy has also slammed on the brakes.

So, what causes a recession? Simple, three consecutive quarterly drops in GPD. Oh, what causes that? Well, retail sales plays a big part. Then there's a lack of corporate expansion, defined as corporate contraction which results in people getting laid off. Then there is confidence - my personal favorite - with out confidence, nobody does nuthin!

By using clever financial engineering - defined as making assets "affordable", by lowering monthly carrying costs - the wizards on the Street made it possible for a ton of people to be able to buy a ton of new stuff. Now, most people do not need new cars and new houses and new appliances, the sale of which provides the primary engine of economic growth. So, this gets me back to the whole question of liquidity. When people have no ability to pay for the stuff that they never should have purchased in the first place, it results in the default of those peoples' contractual obligation to pay. That sentence tells the whole story. But, instead of the bailout providing cash flow to defaulted assets, it is going into troubled institutions like AIG and Fannie and Freddie.

I don't have the time to really think this through, but I have mentioned the possibility of using an REIT type structure to get mortgage assets back on a cash flow basis. That is, keep as much of the foundation of the mortgage market in place by making sure that there is a "monthly mortgage constant" for all of the crap that was issued. If the defaulted assets that backed up the credit default swap market were, once again, rated where they were when the whole thing took off, wouldn't it be redundant to provide more cash to the issuers of the swaps?

Doesn't it seem to you that these dopes are treating the symptoms and not really trying to find a cure?

Am I over-simplifying? Doesn't it make sense though? Think about it! I have to go to work.