a) The US must spend more; i.e. run a current account deficit

b) The credit risk is “transformed”

The second point is mischaracterized. The risk is not really transformed. What is happening is that China et al have purchased a disproportionate share of risk free assets. It’s an alternative to vendor financing, not a transformation per se. Financing has already been provided within the US. SIVs transform risk. Treasury financing doesn’t do that explicitly.

“Nassim Taleb the author of “The Black Swan: The Impact of the Highly Improbable”, has a simple proposal to as he puts it, “save capitalism and free markets from the banks.”

What he proposes is simply he standard public policy solution to the problem of financial sector regulation. It minimizes taxpayer risk. I like it, but it may not be optimal.

First, such a scheme would have to be global (although if the US did something like this the other democratic market economies could hardly differ.

Second, it would pose a serious problem for politicians. Our, inherently ambiguous financial system provides lots of opportunities for interest groups that are always better at collective action than “the taxpayer”. Politicians feed off unfinished business and imperfect solutions and will tinker endlessly but rarely improve.

The latest coming out of Washington is that ambiguity will remain the dominant feature. Lots of oversight, gaps will be filled etc. But no mention of ending the government’s contingent liabilities. We have no real solution for F&F and the new systemic oversight body will have to invent its own wheels. If it does its job well, the industry will wither, no one would like to be one of those systemic firms. If it shirks (as it probably will, from a future ex post perspective) the industry will start writing options again against a free taxpayer hedge.

Like Taleb, I have a brilliant solution: move the government to financial reporting as if it were a private, listed corporation. Exit ambiguity..

The paper labels the difference between these two pieces the net investment position of the US. The terminology seems unusual, but the net result is additional income to the US. In a sense, it’s the domestic gravy on top of international dark matter.

The dark matter theory focused on the return part of the risk/return trade-off. The crisis pointed out the risk part – at least in terms of credit risk – although mostly in terms of the marked to market impact on US assets.

Nassim Taleb the author of “The Black Swan: The Impact of the Highly Improbable”, has a simple proposal to as he puts it, “save capitalism and free markets from the banks.”

Nationalise the banks, limit the rewards to those who work in what he calls the “utility” part of the system and have a completely uninsured second leg that can take all the risks it wants and lose its shirt, he said in an interview in Davos at the World Economic Forum.

“They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking.”

“Which is why eventually as someone who loves free markets, a total nationalisation of the part of the business that requires insurance and does clearing and payments needs to happen.”

http://blogs.reuters.com/jim-saft/2009/01/30/save-capitalism-from-the-banks-nassim-taleb/

I just found someone gloomier than Roubini. It’s King McCully of Pimco. He says the Fed won’t raise interest rate policy until sometime in 2011.

If we back that up using normal Fed behavior, they don’t raise rates until they see a trend of rising employment. And it takes 3 months of data to establish a trend.

So that means no turn for a year and a half yet.

I believe it, because the last two recessions we’ve had were because certain industries got way overheated, then busted, and going forward the jobs never came back.

So we need new industries to replace the lost jobs. Hard to tell what they may be…webcamgirls looks like it’s a growing field. Some of them even claim to be finance majors from Vassar. But I’m afraid that Pixar may enter the market and the poor lasses will lose their jobs to automation.

So I really don’t know what the answer is.