>As 1998 proved, certain parts of the bond market (asset backed
>securities, mortgage bonds, junk) are really prone to crunch.
And when they crunch, all the normal pricing relationships are thrown out of whack, and some derivatives, which are structured assuming normal pricing relationships, can go very sour. Last time that happened, we had LTCM, so the Fed never really let the process run its course. You say:
>I personally am sceptical of whether credit crunches can occur in
>well-capitalised banking systems. On balance, my view is that the USA
>remains secure; this is the downside.
which is probably true, but the non-banking system (to which the banking system is pretty tightly attached) may be another story. Hedge funds, mutual funds, even the proprietary trading desks of the otherwise well-cap'd commercial banks... If you want a scare-bear story, that's the one, isn't it?
Doug