Part 2/8:
The private, non-bank investors who are supplying this credit protection are the same ones who were caught flat-footed on macro risks back in early August. They now have a "soft landing fever," happily accepting lower and lower payments for guaranteeing losses, even as the risks of doing so are rising.
This creates a feedback loop where further setbacks in employment and incomes lead to worsening credit quality, which in turn raises the demand from banks for more credit protection. The private non-banks are currently happy to supply this protection, but once it goes too far, they may stop supplying it or demand too high a rate to keep it up.