This columnist has followed the recent turbulence in the financial markets with curiosity, a critical eye, and a perspective tempered by over four decades of history.
Your reporter has chronicled this week's events in two articles and a poll:
This writer has made three observations concerning the current crisis:
1. The lack of a reliable and predictable mechanism for the orderly liquidation of failing US companies seems to have accelerated, not eased, investor nervousness. Without an orderly, predictable, and rational process for liquidating failed businesses, volatility will only worsen.
2. A functioning, rational regulatory structure, adapted to new global finance realities and competent to identify risks before they threaten financial foundations may be a neccesary condition for the return of market stability.
3. And some entity constructed to assess, evaluate, and regulate new financial instruments---including their legality and potential for abuse---in real time might prevent future interruptions.
Some explanation and clarification is required: credit ought to be given where credit is due. Treasury Secretary Henry Paulson has been one of the few steadfast faces in the crowd over the past few months. Paulson is working under difficult circumstances to say the least.
With regard to the observation that there is currently no reliable and predictable mechanism for the orderly liquidation of failing US companies; that function is currently being performed by a person or people (Paulson, Bernanke, Cox) whereas a mechanism or structure seems more rational.
Markets are in the midst of a complicated crisis, not at the bottom. Yesterday, Putnam Mutual Funds came under threat and there have been additional developments as well to be reported in a later column.
Markets are also in the midst of a US presidential election. Congress and the White House are vowing cooperation on a "bipartisan" measure to put a stop-gap in place.
Markets temporarily--that is yesterday---reacted positively to that news. Yet are the markets rational? Are the markets a good predictor of the future?
What is the wisdom of an emergency measure to placate a fluctuating, wildly gyrating financial system with an uncertain outlook?