Friday, November 7, 2008

"The end of the crisis is impossible to forecast without knowing how the financial industry eventually decides to price these risks."

Free Exchange considers the Warsh comments I picked up from Calculated Risk:

"Why is this? Because the financial industry is still trying to figure out what its future is. It’s a popular theory that this crisis will fade and economic growth resume once home prices stop falling, something that could plausibly happen in the next 12 months when they have returned to normal relationships to income and rents. But Mr Warsh thinks that misdiagnoses the nature of the crisis. It’s not only home prices and the underlying debt that were mispriced, but virtually every asset class. There has been a “systematic underpricing of once seemingly benign risks—credit, liquidity, counterparty, and even sovereign risks.” Reassessments “of these risks are being crudely incorporated into the pricing of virtually all assets.” The end of the crisis is impossible to forecast without knowing how the financial industry eventually decides to price these risks."

Here's my comment:

"It’s not only home prices and the underlying debt that were mispriced, but virtually every asset class. There has been a “systematic underpricing of once seemingly benign risks—credit, liquidity, counterparty, and even sovereign risks.” Reassessments “of these risks are being crudely incorporated into the pricing of virtually all assets.”

I think that it's pretty clear what he wants. He wants assets to be correctly priced. When we get there, wherever that happens to be, we can situate ourselves on the map, grid, index, graph, we're working on, and take up our journey again from that point.

First we need something that says, " You are here".
11/7/2008 4:52 PM GST

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