How Tough Can It Be to Reduce the Contribution of the Fear Factor to the Credit Crisis?
Too many people built too many financial instruments on top of too much credit. It’s getting quite tiring listening to people complain about “how complex” and “how complicated” the instruments are, and why we need to spend trillions simply because the mess can’t be cleaned up.
Well, Wikipedia has a nice article explaining the poster child for these instruments, the CDO. Yes, it’s a bit complicated. But excuse me! It’s not rocket science. We seem to have entered into an era of global mass hysteria over the impact of the credit losses in the instruments below the CDO level, mostly MBS. People fear the complexity of the instruments above the MBS level and the psychology of market fear is in control.
Those who have direct interests in these instruments need to get a grip, roll up their sleeves, and make them transparent. It shouldn’t take a year. It shouldn’t take a month. Enough complaining about how tough it is to deal with these assets. People created them and people can simplify them and people can explain them so that people can buy and sell them. And people can also create new instruments that provide enough information to the market in usable formats to fund new credit.
If anyone can explain why it’s impossible to make the so-called troubled assets transparent enough to be bought and sold in a free market, please do. If anyone can explain how the costs of doing so could possibly exceed the cost of continued whining about the complexity, please do. I thought algebra and geometry and calculus were pretty tough when I first attacked them, but a little bit of hard work made it possible to master them all. Now we have computers that can beat the world’s best chess player. And it’s pretty certain that the people who created the complex instruments weren’t that smart.
To the extent investors created too much credit, making the instruments transparent won’t solve the economic contraction. But until the instruments are made transparent, it’s impossible to evaluate just how much excess credit was created. We don’t know how much of the contraction in equity and credit markets is due to bad credit and how much is due to the fear factor that’s exacerbated each time someone complains that things are “too complicated.” We won’t know the impact of the excess credit until we eliminate the fear factor from the equation. It’s time for leadership to do that.
[...] of opaque and confusing language in drafting financial instruments,” has been drowned out by constant whining that the toxic security structure is too complicated for normal human beings to com…. But there is good news. The FDIC has key duties in Treasury’s current bailout plan and as [...]