There’s no market if there are no trades. That’s the donnybrook we find ourselves in now as the banks (with the aid of Geithner and Obama) refuse to sell their junk assets at prices the market has set—because it would show them to be insolvent. Instead, the banks and the administration cling to the hope that these assets will come back into favor, at much higher prices—something that’s just not gonna happen.
Interestingly, Tett reports that even the computers could hardly keep up with the complexity:
The result was that a set of innovations that were supposed to create freer markets actually produced an opaque world in which risk was being concentrated – and in ways almost nobody understood. By 2006, it could “take a whole weekend” for computers to perform the calculations needed to assess the risks of complex CDOs, admit officials at Standard & Poor’s rating agency.
She then writes about how the downward spiral began, as investors realized the computer models and ratings agencies they’d relied on had been horribly wrong. And here’s the lesson:
But the brutal truth is that until financial markets live up to their name – becoming places where assets are traded and priced in a credible manner – it will be difficult to rebuild investor trust. Not for nothing does the root of the word “credit” come from the Latin credere, meaning “to believe”.
This can’t be emphasized enough. If markets are not transparent and liquid then they’re not really markets at all—they’re casinos. If a product is too complex for mere mortals (see: bankers) to understand, why should it be allowed to be created at all?