Required Reading

"Who's Who" Discussion of Financial Crisis

Best read of the weekend: a roundtable called "The Crisis and How to Deal With It."

Participants are a "who's who" of finance and public policy: Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, and George Soros.

Warning: their (quite sober) analyses are not for the easily spooked or faint of heart. Here's an excerpt from Nouriel Roubini:

There are only a few ways of resolving a [huge national] debt problem: either you default on it as countries like Argentina did; you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending.

As depressing as the mess, its causes, and likely solutions are . . it's encouraging that someone out there has got a handle on what to do about it.

Now, if only they were in charge . .

George Soros on CDS

Everything Clear Now?

Going short on bonds by buying a Credit Default Swap ("CDS") contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in.

--George Soros, "One Way to Stop Bear Raids"; The Wall Street
Journal (3/24/09)

Huh??

There's plenty of commentary out there already on the Treasury's new initiative to buy the big banks' toxic assets. So, I'm not going to add mine.

However, clearly the stock market (or at least Wall Street) loved it: it exploded to the upside yesterday, with the Dow Jones rallying 500 points, or about 7%.

Whatever the merits of Treasury's plan, one thing it is not is clear. Or simple.

Of course, neither are the problems it is attempting to address (Exhibit A is Soros' op-ed piece -- and hundreds more like it. If you're befuddled, Soros, a multi-billionaire and investing legend, is basically saying that flaws in the marketplace permited a "piling-on" phenomenon that led to the fall of financial giants like Lehman Brothers, Bear Stearns, and AIG).

And still . . . it seems like brain-numbing complexity isn't just symptomatic of the problem in the financial markets, it is the problem. Which means the cure is simplicity.

Put it this way: after witnessing the financial system crash so spectacularly, you'd think the first order of business would be to impose lower speed limits.