« Jeremy Grantham in Weekend Barron's | Main | Quote du Jour: Paulson and the Zero Point »

Latest Stories

• Morning Reading 01/09/09
• An Email Visit with Broadcom's Henry Nicholas
• Palm Pre, Plus Roger and Me
• You Say “Recession”, I Say “Recovery”, etc.
• Quote du Jour: Marc Rich

October 11, 2008

Time to Stop Digging

Good column from Steve Pearlstein in the weekend Washington Post. He argues that stop-gaps are now making things worse in the financial crisis, and we need to focus on the things that matter, as opposed to bailing out the bank du jour, or propping up every financial institution that comes looking for money.

What things matter? A CDS clearinghouse, guaranteeing interbank short-term lending, and pre-emptively directing capital toward financial and non-financial companies whose failures might represent the biggest risks to the global system.

Remember the Rule of Holes: When you find yourself in one, the first thing to do is to stop digging.

Right now we're in one of the deepest economic holes anyone has ever seen. And what we need to do is to stop making things worse by continuing to over-rely on financial markets and financial institutions that have proven to be incapable of performing their core missions: getting capital to where it needs to go and pricing that capital in a way that reflects the risks and underlying economic values. We have to stop digging. Another week like this one, and there won't be much left to rescue.

To begin, the markets could use a timeout just about now, something that lasts longer than a weekend and gives policymakers around the world the chance to get a good nice sleep and evaluate their options without feeling like they have to respond to every movement flashing across their Bloomberg screens. It would allow some time for passions to cool and for real investors to regain control of markets now dominated by the computerized short-term trading strategies of hedge funds and hot-shot money managers desperate to recoup some of their losses. It would give banks and major corporations a chance to regain the trust of the markets by issuing unscheduled updates on their financial condition. And it would be a powerful reminder to everyone that markets need to serve the interests of the economy and society, not the other way around.

...Wouldn't that be picking winners and losers? In a way, yes. But remember that the reason we are in this fix is because markets, at least for the moment, are broken and can't be relied on to allocate capital more wisely than Hank Paulson. A little bit of well-timed, well-crafted socialism is just the thing to save capitalism from itself.

More here.

Sphere It   |   Digg it   |   Bookmark it   |   Stumble it   |   Facebook it