This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

...

"They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Paulson's shift in strategy received a lot of praise. Here is Ritholtz arguing for the shift pre-shift. But, apparently there are critics out there.

The Weekend Interview - WSJ.com

WARREN E. BUFFETT

Be fearful when others are greedy, and be greedy when others are fearful.

Op-Ed Contributor - Buy American. I Am. - NYTimes.com

"We hope that as a content uploader, you have gained a sense of some of the challenges we face everyday in operating YouTube," she added.

This just keeps getting better!

YouTube to McCain: You Made Your DMCA Bed, Lie in It | Threat Level from Wired.com

2008-10-05: Damn It Feels Good To Be a Banksta

Take a stroll through the archive, Ishida has been on a roll for about the last 2 months!

Sinfest

[O]verreaching copyright claims have resulted in the removal of non-infringing campaign videos from YouTube, thus silencing political speech. Numerous times during the course of the campaign, our advertisements or web videos have been the subject of DMCA takedown notices regarding uses that are clearly privileged under the fair use doctrine. The uses at issue have been the inclusion of fewer than ten seconds of footage from news broadcasts in campaign ads or videos, as a basis for commentary on the issues presented in the news reports, or on the reports themselves. These are paradigmatic examples of fair use...

Blahahaha McCain voted for the DMCA

McCain Campaign Feels DMCA Sting | Electronic Frontier Foundation

North Korea has now achieved one of its most-prized objectives: removal from the U.S. list of state sponsors of terrorism. In exchange, the U.S. has received "promises" on verification that are vague and amount to an agreement to negotiate the critical points later.

The NK delisting is HUGE. The question of whether they got everything they needed from this seems open but I would be very, very surprised if the Bush Administration lowered sanctions on NK prematurely.

Bush's North Korea Surrender Will Have Lasting Consequences - WSJ.com

One of the constant comments is that stock plunges like this are buying opportunities because markets always come back. Obviously, the people saying this are not including the Japanese stock market in their sample.

Angry Bear: S&P 500 VS NIKKEI 225

The Country is Fundamentally Sound; 'Don't Panic, Stocks are Safe!'

Fun collection of short videos.

The Big Picture | 1929 MovieTone News on Stock Market Crash

Some further ruminations on Janelane's prior post.

The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984. It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000.

Could the market really overshoot that far on the downside? "That's a serious possibility, because it's done it before," says Prof. Shiller. "It strikes me that it might go down a lot more" from current levels.

In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.

What History Tells Us About the Market - WSJ.com

So, here is what I think.

In the mid nineties things got out of control. They knew it was a bubble. It got huge. Really really huge. If you compare the late nineties DJIA with the late eighties Nikkei, it looks the same. A massive, massive bubble. No one should have been buying stocks in the late nineties.

The Japanese dealt with this by attempting to wring the excesses out of their system coercively. The result was 15 years of anemic growth and a stock market that only goes down.

So, instead, we blew a bubble... We blew it at just the right time. As the original bubble fell apart around 2002 the new bubble, based on loose cash, took its place.

Below these bubbles the real economy still grows. In fact, because of the bubble, our real economy grew faster during this decade that it would have if they had just let the post millennial crash occur.

The idea is to run the bubble until the actual size of the economy catches up... They chose the moment to deflate it. They chose to raise the interest rates. They knew what would happen.

If 8,500 is a reasonable value for the DJIA in 2008 after years of bubble assisted growth, imagine how unreasonable it must have been in the late nineties. Imagine how unreasonable Dow 10,000 was.

Do we need another bubble? Maybe we don't. Maybe our valuations are now close enough to reality that we can simply proceed from here.

The only problem that we have right now is that I think the wizards that are running this process have lost control of the deflation. Its not happening as gracefully as they had hoped. This is a very dangerous time.

RE: Remembering a Classic Investing Theory - New York Times