In Which I Publicly Make The State Of My Ignorance More Specific

IN WHICH I PUBLICLY MAKE THE STATE OF MY IGNORANCE MORE SPECIFIC....Like a lot of people, I've spent a fair amount of time over the past few months trying to understand the subprime debacle: CDOs, SIVs, mezzanine tranches, the housing bubble, diversification correlations, etc. etc. And some of this stuff I've finally figured out. Sort of. But there's one part that I still don't get, a piece of the puzzle where a card always seems to get palmed with no further explanation. For example, here's Jared Bernstein explaining what happened when the housing bubble burst:
Then the loans started to go bad, but because they were squirreled away who knows where, no one knew quite what to do. So the part of the economy that provides credit froze up, and without free-flowing credit, our economy can't expand.
I'm not trying to pick on Jared; his post just happened to be handy. But why is it that "the part of the economy that provides credit froze up"? There always seems to be some hand waving at that point, and aside from bits and pieces that I can't quite put together into a cohesive whole, there's never an explanation of why a meltdown in one particular (admittedly large) sector of the financial industry caused the entire commercial paper market to essentially freeze solid.

So consider this post a public plea for someone to explain that particular part of the puzzle in layman's terms. Why are the credit markets frozen?

And on a related note, I guess I have another question: is it really that hard to figure out the value of all the assets rolled up into the various CDOs and SIVs (the "who knows where" in Jared's post above) that caused this mess in the first place? I know it's not trivial, especially when the market is in freefall, but there are underlying assets behind all these vehicles. The proposition that nobody really knows what any of this stuff is worth just doesn't seem all that plausible. Anyone care to explain this too?

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