Great video (via Barry) of economist Irving Fischer talking stocks after the crash of 1929:

Interesting tidbit in a Paul Krugman column in the Monday NY Times. He lauds U.K. Prime Minister Gordon Brown's approach to bailing out U.K. banks, and says Brown is the real agenda-setter here with his recapitalization program, as opposed to the mineral bath Treasury Secretary proposed to give domestic financial services via his TARP plan. And then comes this:

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” [Emphasis mine]

Now, this could be Krugman giving fellow economist Bernanke cover, or it could be Bernanke's friends spinning things after the TARP auction program came under heavy fire as being slow, impractical, etc. Nevertheless, it seems there is newly a split between Paulson and Bernanke on the bailout.

More here.

I want to warn people about another derivatives sub-market, one that gets far less attention than the purportedly $36-trillion market (or whatever the current claimed number is) for credit default swaps. It is something called "shares".

You may not have heard of them, so here is a description:

A share is itself a derivative, composed of several underylings: capital value changes, dividends, an option that it might be taken over upping the price, and a set of entertaining variable tax consequences, since dividends and capital growth/lose are taxes quite differently from each other and for different classes of investor.

[via Wilmott]

Sneaky of capital markets regulators to be trying to trick us into going from safe credit default swaps over to tricky derivatives like shares. Those things sound nasty.

Huge congratulations to Princeton economist -- and part-time NY Times columnist -- Paul Krugman for winning the Nobel in Economics today.

Mr. Krugman was the lone winner of the 10 million kronor ($1.4 million) award and the latest in a string of American researchers to be honored. The Royal Swedish Academy of Sciences praised Mr. Krugman for formulating a new theory to answer questions about free trade.

"What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions," the academy said in its citation. "He has thereby integrated the previously disparate research fields of international trade and economic geography," it said.

More here.

This, boys and girls, is what you call a relief rally in markets. There are some staggering numbers out there, especially from Germany, Hong Kong, and Brazil indices.

As I wrote in my weekend TheStreet column, this sort of move was more or less inevitable after the sorts of downbound moves we've seen, so long as nothing imploded over the weekend. It will give rise to non-stop cries of "the bottom is in", which I don't believe, but that's not the same thing as saying a) that markets were ever going to keep falling 20% a week, or b) that we couldn't have a darn impressive run here.

[via Finviz]

936 points on the Dow. 11.1%. Oh. My. Goodness. Almost unbelievable. I'll leave to others to put it in context in terms of biggest-first-day-after-apocalypse-rebounds-on-prime-numbered-weekdays-in-October, but I'll just say this: the G7 put sure beats the crap out of the Greenspan put.

Somewhat more seriously, has it changed anything for me? Not really. Governments around the world have said that they will prop up financial markets, not letting major institutions fail. And that's mostly good, if not entirely unexpected, and if replete with unintended consequences galore.

But let's get big picture for a second. Recall, there had been been two broad fears taking markets lower. First, a fear that financial systems themselves were collapsing worldwide. That fear seemed overdone (if understandable in the context), given the actions governments were willing to take. And now markets feel justified in bouncing the other way with the G7 essentially supplying a "put" option here -- it is saying that the credit system itself will not be allowed to fail.

The second fear has not gone away, however. And that is a global recession caused by an immense contraction caused, in large part, by a credit bubble collapse. Having saved the credit system we are not going to return to the days of yore, with too many banks, too much leverage, and too much consumer debt. The system will not do that again -- if not never, then likely not again in our lives. As a result, consumers will become savers, to the extent they can, and the upshot is that credit market weakness, having hit the broader economy, will circle back and hit credit markets, and that will circle back to consumers again. Earnings estimates for 2008 and 2009 are too high (I will come back to that in another post), and while markets aren't as expensive as they were, they are far from cheap. We may not have 20% more downside, but churning away in place seems the most plausible present bullish scenario.

What would change things for me? Let me revisit that in an upcoming post.

In an update to my "surprise, surprise" file, reader Greg Church caught this release from the WHO:

New virus from Arenaviridae family in South Africa and Zambia - Update

13 October 2008 -- The results of tests conducted at the Special Pathogens Unit, National Institute for Communicable Diseases (NICD) of the National Health Laboratory Service in Johannesburg, and at the Special Pathogens and Infectious Disease Pathology branches of the Centers for Disease Control in Atlanta, USA, provide preliminary evidence that the causative agent of the disease which has resulted in the recent deaths of 3 people from Zambia and South Africa, is a virus from the Arenaviridae family.

Analysis continues at the NICD and CDC in order to characterize this virus more fully. CDC and NICD are technical partners in the Global Outbreak Alert and Response Network (GOARN).

Meanwhile, a new case has been confirmed by PCR in South Africa. A nurse who had close contact with an earlier case has become ill, and has been admitted to hospital. Contacts have been identified and are being followed-up.

Now, to keep things in context, while this virus is demonstrating considerably lethality, such arenavirus are, to my knowledge, almost always transmitted via contact, usually food contamination involving rodents.

More here.

Provocative post by John Jansen on regulating the markets via tying trader performance more closely to longer-term performance. It's an idea I've been pushing too, but John has articulated it better:

In the current framework a trader’s focus is only on the fiscal year in which his bonus is determined. As each new year begins, individual traders cash their bonus checks and start the year “tabla rasa”. The motivation for a trader is to maximize the current year bonus.

I think that this can lead to perverse risk taking and probably did as the initial subprime mess unraveled. I offer the hypothetical case of a proprietary trader who had been eminently successful for several years in a row and chalked up large bonuses. We are well into a hypothetical 5th year and things are not going so well as the trade sours big time. Rather than unwind the trade and take an acceptable loss, the current system encourages a big risky bet. It encourages doubling down or adding to a bad position because there is no penalty for a big bet gone awry.

So in this instance a trader who has enjoyed considerable success and has banked large bonuses might look at the situation and take inordinate risk because the worst outcome is that he returns home as a full time member of the rentier class and he clips his coupons until he finds his next gig.

I would suggest that each year a portion of a trader’s bonus should be held back and that it should be placed in an escrow account of sorts for five years. Let it earn the interest on the 5 year note.

If however, the trader loses some amount of money above some predefined trigger level, then some of those losses should be paid for from the trader’s prior year bonuses.

I think that this would align traders with shareholders and would reduce sloppy risk and sloppy risk control.

More here.