I look at the market right now as somewhat of a Gordian knot. Once the knot is cut, or the credit logjam is released, equities will very quickly reflect that the financial world is not coming to an end. Common sense will return and we will not be 40% down from the highs for long.
If you are a bank right now and can't even value the stuff you have on your own books how can you possibly lend to another entity that is in the same position that you are in. For all you know when price discovery eventually takes place, as it must even with the bailout (perhaps the bailout will be the catalyst and that is why Paulson is talking about using some of it to recapitalize the banks as that is when they will need it), they may go under and it could happen at any time, most likely just when you will probably need all the capital you can get.
In a nutshell I think this is at the heart of the crisis, people are terrified of the eventual moment of truth when their assets are priced and they are trying to hoard as much cash as they can so that they can survive it if it is much worse than expected. So bring on price discovery, let everyone know where they stand, and a normal market will resume and likely it will not be as bad as people are currently projecting.
Its like when someone tells you that they have bad news. You worry and worry and imagine just how bad it can be and then when they tell you the actual news it is not as bad as the terrible scenarios that you will have imagined by then. At least I hope that is the way it will go, the news of losses when price discovery starts again and credit instruments that have been frozen start to trade again I hope and expect will not be as bad as everyone is anticipating given the selloff we are having. I think the selling is being fueled by banks and funds preparing for the worst and making sure they have cash on hand when they need it (of course the flip side would be that they know what they have and know just how bad it will be so they are selling now so that when they reveal everything and the market crashes for real they have already sold!)
So perhaps no bottom, or rather recovery (as a bottom will come when those that need to sell have finished doing so) is possible until price discovery on the credit side starts in earnest. So when things like the CME/blackroch CDS exchange go live or the bailout auctions start, maybe then banks/funds will know the worth of what they have and will be able to trade/lend accordingly.
