## Friday, October 10, 2008

### Imploding markets

Well, the Dow Jones index is back at the 1997 levels - slightly above 8,000 points - and many people seem very anxious.

This is a thread for your opinions about the reasons of the chaos in the financial world; ideas what should be done and what shouldn't be done; predictions for the future.

If you want to see how hundreds of Americans react, see e.g. Housing Panic.

Even Lakshmi Mittal lost about USD 35 billion and may soon die of hunger, assuming that the remaining USD 20 billion are not enough to buy food. ;-)

Incidentally, this is a cute piece of history: on June 28th, 2008, we voted in a TRF poll what is the most serious threat to the world economy. Two percent of the respondents answered that it was the housing slump - which is how we called the current problem at that time. Well, it would probably be somewhat more today. Three months can make a lot of difference.

Three years can make some difference, too. Look at the November 2005 video above in which Ben Bernanke explains Paul Sarbanes (a skeptical Senator) how derivatives and hedge funds are sophisticated, safe, and creative. I suspect that his confidence would be somewhat lower today.

#### 1 comment:

1. Do nothing is probably best. If savings-and-loan banks collapse, the depositors should be helped using the normal machinery (e.g. FDIC in the US). Apart from that we should let the gamblers fail. The alternative amounts to a government attempt to create a guaranteed rate of return on investments buy underwriting all risks.

In Israel it's a crime for a bank to offer a "guaranteed return" on a risky investment such as a stock or a mutual fund. Probably it's not a crime for the government to do so, but the laws of supply and demand are not much easier to buck than gravity.