Monday, October 20, 2008

It's not lack of *money* that's the problem..

- it's lack of trust! As the venerable Anna Schwartz succinctly pointed out in Saturday's Wall Street Journal, "The Fed has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

Karl Denninger and many others have been calling for full disclosure of banks' balance sheets for over a year now, and still it hasn't happened! They're obviously never going to start lending again until they know whether the other party can repay the loan, no matter how much money we throw at them. Whatever it takes, Darling? That's what it takes, surely.

Radio 4's File on 4 this week [opens media player] was illuminating, not to say shocking. Well worth a listen, if you're feeling brave. In a nutshell, there are multi-billion pound lawsuits in the offing, against the banks, the regulators and the valuers as a result of recent events which, coupled with the imminent CDSs, spells major trouble for those institutions and the governments who back them.

I've also been reading George Soros's latest book: The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means in which he expounds similar views to the maverick economist Nassim Taleb ("My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the courage to sometimes say: I don’t know.... You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race.") - reflexivity, which is "an act of self-reference where examination or action 'bends back on', refers to, and affects the entity instigating the action or examination." Soros blames the oversight of this on the part of politicians, regulators and financiers for the problems and he firmly does not believe markets to be always self-correcting. Indeed, he cites historic bail-outs as compelling evidence that they certainly are not.

Finally I want to mention this open farewell letter from self-made hedge fund manager Andrew Lahde to his associates in which he suggested that George Soros "start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest", amongst other ideas. It brought a smile to my face, anyway. Thanks to Tim for pointing me at it.


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