Crisis of Faith

It all comes down to what you believe.  If you believe something has value you might decide to exchange something for it.  If you're unsure if something has value, or worse, suspect that something may be garbage, you're not going to be inclined to trade for it.  Often nothing physical has changed in the object of your valuation when you or the market decides to change your valuation.  Only your mental belief as to that objects valuation-utilitarian, fiscal or otherwise- has changed.  Your belief that your bank will be able to pay you your money that you gave it.  The belief that you are sufficiently capitalized because of new and exotic asset backed securities whose value has never been tested before.  The belief that securitization has ameliorated market risk to a negligible level.  (Despite the fact that every previous  iteration of the idea that some financial innovation has effectively extinguished risk has gone down in flames.) The belief that credit ratings are accurate.  

It was defaults on securitized mortgages that heralded the ascent of our current crisis of fiscal faith.  When this happened, no one believed the valuations of the underlying assets anymore.  Arguably this is irrational as a certain amount of default in a mortgage backed security shouldn't impair the value of the security because it is still backed by real estate that can be sold to compensate the security holder.  But when it dawned on the market that securitization provided an incentive to lenders to lend recklessly because they could bundle and sell their risk to third parties, the market realized that securization also provided an incentive for false valuations.  That is because securitization removes risk from the original risk taker thereby encouraging them to play longer odds.  And when faith was lost in the original valuation, the market in securitized mortgages went belly up.  The disbelief then spread to the other derivatives markets.