"Tits on a bull": Pardon Me?

Willem Buiter with a terrific new post on the current situation:

"The depth of the current crisis is such that the last two tasks of the financial system (risk trading and portfolio management) are being performed abysmally, and the first, the intermediation of financial surpluses and deficits, has effectively ceased to be fulfilled by our financial markets and banks. Financial intermediation has all but ground to a halt.

Many systemically important financial markets are closed to new issuance. Even secondary markets (for trading and pricing existing asset stocks) are badly impaired. Banks have all but stopped lending to households and to non-financial enterprises. Where banks are notionally still present as lenders, the financial terms and non-financial conditions (collateral and other covenants) are often prohibitively onerous."

Please read it all. Here's my comment:

1. After laughing for about ten minutes, and then crying for another ten minutes, these are my, now wait for them, votes:

   (4) Blind fear and panic rule the roost in the banking sector. Bankers are shell-shocked and paralyzed. More Prozac please. ( I’m taking Xanax )

   (C) Nationalise the banks (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets. With 100 percent share ownership by the state, there is no risk of lawsuits about the executive or board of the bank not meeting their fiduciary duty to the shareholders. Full state ownership would make transparent and formal what is already true in substance: but for the financial support of the government (past, current and promised/anticipated in the future), there would no longer be more than at most a handful of viable cross-border banks in the north-Atlantic region.

   ( I’ve been for this from the beginning,not because I like it, but because I could see that TARP or other Hybrid Plans would make a Pig’s Breakfast eventually look like a delicacy )

   Posted by: Don the libertarian Democrat | November 26th, 2008 at 2:21 am |

Here Comes The VIX, Here Comes The VIX

Gillian Tett in the FT:

"A couple of years ago – or before banks started to go bust – economists sometimes liked to talk about a phenomenon they christened The Great Moderation.

This was the idea that the 21st-century financial system and global economy had become so stable and sophisticated that dramatic swings in activity had seemingly disappeared. Volatility, in other words, was supposed to be an issue of the past.

These days a new phrase is needed to describe these Not-So-Moderate-After-All times (the Great Panic, perhaps?). On Friday, the Chicago Board Options Exchange Volatility Index, the Vix, rocketed 32.1 per cent to 89.53, as equity markets suffered another dramatic sell-off. The gyrations of the yen, euro, sterling and dollar have also been wild, pushing levels of currency volatility to heights barely seen in decades."

So let's:

1) Retire the phrase " The Great Moderation", and welcome in "The Great Volatility".
2) Add the Vix to our derivative plays.
3) Find risk-taking investors.
4) Retire the VAR ( Value at risk ) model for hedge funds. Too optimistic on the way up, too pessimistic on the way down. They appear here to be akin to laws.
5) Hope the policy-maker's prayers for hedge funds health works.

Anyway, read her whole post, since a couple of the suggestions are mine.

However, here we meet again our irrational and overly timid investor:

"On one level the absence of scavengers might seem “irrational”, given that plenty of cash-rich institutions still exist. On another level it makes perfect sense, given how shell-shocked many institutions now seem – and the sheer difficulty of predicting what other disorientated investors might do next."

He's turning up quite a bit.