So we're in the midst of this credit crisis. People are losing their homes. Financial institutions register more quarterly writedowns. Some investors lose big bucks. It's much harder for anyone to get financing on anything. And many observers fear there is more bad news to come.

Wall Street banks had created their alphabet soup of securitized vehicles and derivative products (expanding them to include mortgages and real estate), traded by incomprehensible computerized programs. Yes, there have been the recent losses, but these companies have raked in countless profits off this activity all in the name of creating liquidity for the markets, which the pr tells us facilitates entrepreneurship, the capitalist engine, growth and prosperity. While recent increases in asset values proved phantom, the transaction fees from deals made in bidding frenzies were paid out in hard cash. A few executives have lost their jobs, but nobody is giving back those big bonuses. And for the last six months and counting instead of more liquidity, we have (a lot) less in the system. Streams of capital from 2005 and 2006 have suddenly turned into gutter slush -- that cold, clammy soup which ruins patent leather shoes if the chauffeur driven limo is parked too far from curbside.

Right now, government pooh-bahs and banker elites focus on stemming the damage in the mortgage markets, and hope to sidestep other crises like mortgage bond insurer collapses. The Federal Reserve remedy relies on low interest rate morphine -- cheap money -- the elixir that helped us into the mess in the first place. Rating agency watchdogs, who get paid by bond issuers, assure us they will be more vigilant in the future.

Once we get through this rough patch, what needs to be done to ensure this mess doesn't happen again? We know Wall Street and financial industry barons will put up firewalls against greater regulation, warning about constricting growth (certainly to their bank accounts). But doesn't some balance need to be returned to the system on the regulation side? How much will be determined by how bad things get: The worse the fallout and the longer credit markets spasm, the more political pressure for greater government oversight. This tug of war will start to play out during the election campaign, but we are a new administration and Congress away from seeing what happens.

In the meantime, watch where you step. Our winter continues.

Instant Insights /

Slushy liquidity crunches laissez faire

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