Bye, Bye Libertarianism

As a recovering ex-Libertarian, I understand all-too-well the allure of logical, perfectly-reasoned ideas - that also don't happen to work. This is not an indictment of all ideas Libertarian but of one of its core tenets, "Government is the problem - not the solution." Sound familiar?

The world we live in is far too complex for us to trust one-big-idea-fits-all ideologues - either from the Right, the Left or all persuasions in-between. Here's a great article from Jacob Weisberg of Slate on that topic. And a commentary by Fareed Zakaria on the new approach we must take.

Credit Default Swaps

An easy-to-follow exposé of how the Wizards on the Street got us into this mess. It's a classic tale of smarts, ambition and a fatal inability to think through the consequences of one little 'innovation.'

The Times maketh the Man

High praise for Gordon Brown from the Financial Times. Compare and contrast to our own inept President. Whatever happened to "I'm the Decider!"

Keen on Keynes

John Maynard Keynes would have found today's financial crisis all too familiar...

The Conscience of a Liberal

I'm delighted to hear that Paul Krugman has won the Nobel Prize for Economics. His book "The Conscience of a Liberal," currently in my reading-list, is a pretty devastating critique of market fundamentalism. He's one of the people that called the current financial crisis way before it was this big. And pointed a way to get things on back on track.

Valuation...Shmaluation

Another piece of market orthodoxy bites the dust: markets always clear - or in the language of your Econ 101 Classes, Supply and Demand Curves "intersect." In many cases such as the proposed bailout of Wall Street agreeing on a 'clearing price' for illiquid mortage bonds, CDOs etc is a fool's game.

Banks 101

Can't tell the difference between a Piggy Bank and an Investment Bank? Fear not. A nifty explanation of the kinds of banks floating around...

Efficient Markets R.I.P.

I never bought into that old staple of my Finance 101 Classes at Berkeley: The Efficient Markets Hypothesis. A new book sees the current financial crisis as the ultimate repudiation of that theory which is pretty much taught as gospel at most business schools.

In the words of a somewhat famous man, "I'd be a bum on the street with a tin cup if the markets were always efficient."

Far better to start by acknowledging that markets, like the people that constitute them, have many inefficiencies, starting with the cognitive biases of the participants. This is the central insight of Behavioral Finance, incidentally my favorite class at Cal.

And Now This...

The Fed takes over. The failure of AIG - and of the Credit Default Swaps market - would have resulted in an economic death-spiral for the world economy, not just the United States.

The circumstances today dwarf the conditions that led to the bailout of Long-Term Capital in 1998. The lessons of that disaster were willfully ignored. The reason: Chairman Greenspan, Phil Gramm and the Republican faithful - and to some extent the Democrats too - were too enthralled with the notion that 'Markets always work.' Ideology trumped a sober-minded assessment of the ground reality. Facts to the contrary be damned: Potemkin Village, anyone?

That said, since taxpayers foot the bill today, they should share in the gains tomorrow. Fair is fair.

Market Failure

While I generally believe in free markets, I am also keenly aware of market failures such as the one demonstrated by the astounding collapse of Lehman Brothers. Economic Fundamentalism on both sides of the politico-economic divide - right and left - has left its mark on countries the world over. And not for the better. Clearly, unquestioning adherence to hard ideological positions is the way to economic hell.