The senate is just now voting on a ‘rescue’ bill much like what was rejected by the house this Monday. Roughly it would authorize Paulson to spend up to $700,000,000,000 buying ‘poison assets’ based mostly on mortgages that were widely seen to be troublesome when they were created. The lack of a market for these assets and the concomitant lack of a price, gives banks an excuse for not marking values to market of their assets.

There are many perspectives on this situation. I provide several slightly cynical word cartoons here, hopefully useful for thinking about the situation. Generally the situation is a signal that we are doing something wrong and the above bill tries desperately to ignore the signal. I have no clear answer as the signal’s meaning, but merely some possibilities.

Our collective planning is kaput.
Fortunately we have never attempted collective central planning as Lenin inaugurated. Our distributed free market tendencies have made our nation the most powerful country on earth. Yet something is amiss. Some blame lack of government regulation but I demur.

The collective planning I refer to is the uncoordinated sort of thing that Adam Smith had in mind when he introduced the “invisible hand” to describe how individual greed leads to overall wealth, at least when the greedy play by the rules of property rights.

My scenario here assumes that the players all played by the rules. Financial people dealt in mortgages of dubious quality. They wrote the initial mortgages then packaged and sold them as securities. Some bought these securities—others did not. Since the returns on the dubious mortgages were higher, securities based thereon appreciated faster. The fundamentals of these various securities was conveniently obscured and people were attracted to securities with higher returns.

People who evaluated risks assumed that mortgage defaults were uncorrelated. The risk that housing prices would decrease seems not to have been considered.

Managers of these funds seem to have understood the danger for they arranged golden parachutes with which to escape upon failure. Fund managers who avoided risky securities did not perform well and their funds dried up.

Mandelbrot rants that price behavior is not Gaussian. He is right. Investors, institutional and private, including me, look at short term growth rates, perhaps a decade. The flakes win out.

We build too many houses and too few gadgets that foreigners want.
By gadgets I include software and services. Our balance of payments is obscene. There are perhaps $1012 in Asian banks as reserves.

This has been very convenient as it has allowed us to receive booty from Asian factories paying much less than if China and Japan were not using the dollar to back their currencies, Also China depresses Renmembi relative to the dollar by buying dollars and printing Renmembi.

I admit I don't see the direct causal chain from this to the crisis.

Alvaro Vargas Llosa argues that the bill amounts to nationalization of Wall Street.