THROWING WATER ON AN OIL FIRE
Well, Paulson just came out and said he was going to use a Class A fire extinguisher on a Class D fire. In other words, we're throwing water on an oil fire ...
Let's hope he's right ... he certainly didn't say what he would do if he was ... wrong, if the problem with mortgages keeps getting bigger, for instance.
Altogether, I interpret it that Morgan Stanley - or other large investment banks - will not be allowed to fail. (At least, as far as one can tell, reading the tea leaves, that's the institution that they have in mind - do you know who else they are talking about?).
TAKE TWO
Lots of people want the inter-bank market backstopped. Here is my write-up on that, if you missed it.
Be careful what you wish for ... (Not surprisingly, there are folks on CNBC "convinced" that it is now the "number one" thing to do - until next week. Oy!)
WHAT TO DO
Here's what may be the problem, in terms of process, of why it is taking so long for the "collective conscience" to figure out what to do?
People go and talk to CEOs and accountants. They don't understand the problems, because many of them do not have markets experience and don't understand the financial products they sell, from a risk perspective, so they give prescriptions that make sense to them. We need this, we need that. We need capital. We need price-discovery, so we can get liquidity. We need to stop mark-to-market. It's the short-sellers.
So far, this theory of what is going on accounts for the piecemeal approach we've seen so far, including the inability to size up the scope of the problem initially.
GET PAST THE TOP-LAYER OF "MANAGEMENT" - A Brady-plan for RMBS
They need to get past the top-layer (and lobbyists?) and start talking to the people who value, trade, and invest in the securities that are "distressed".
It's the best way to get to a robust policy prescription.
What's more, it's easy to figure out and easy to explain. No one will like it, politically, conservative or liberal, but that's the way it is ... with "medicine".
Friday, October 10, 2008
Problem Misspecification - If We Had Only Had Hearings, Expert Testimony
