Here is the beginning and end of a (much longer) Q&A with Gary Gorton discussing the financial crisis. He explains how the crisis was generated by a bank run much like past bank runs, but in a different type of asset and in a different segment of the banking system. 

I have to say, Dodd’s proposed financial reform bill is an improvement over what was previously offered in both House and Senate. In particular, I like the attempt at clearly distinguishing between solvency and liquidity problems, as well as the publicity requirements surrounding emergency assistance facilities.

Don't let anybody tell you that they know what the Chinese government will do with the yuan because they don't. If you are interested in the pros and cons of yuan revaluation, some time ago Michael Pettis wrote a nice article worth revisiting. Basically, all signs economic point toward yuan appreciation.

Did big banks break the law during our recent global debt-fuelled boom?  The usual answer is: no – they just took advantage of loopholes and captured regulators.  The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.

Senator Dodd’s financial reform bill will be introduced in the Senate Banking Committee today.  Unfortunately, on the major issue – too big to fail financial institutions that caused the 2008-09 crisis and that will likely trigger the next meltdown – there is nothing meaningful in the proposed legislation.

What is it about derivatives that makes otherwise rational humans become so damned stupid? There is no need to over-complicate this; a rather simple series of steps can be undertaken to bring the most dangerous of derivatives out of the shadows and into light of day.

The National Association for Business Economics does a semi-annual Economic Policy Survey of its members, who are primarily private-sector economists. The March 2010 survey isn’t up on their site yet, but this is what it has to say about the Consumer Financial Protection Agency:

“A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental.  On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.”

For nearly two years now we have waited for a speech.  We need a simple speech and a direct speech – most of all a political speech – about what exactly happened to our financial system, and therefore to our economy, and what we must do to make sure it can never happen again.

A question of values …

Derivative contracts are valued on a mark-to-market ("MtM") basis. This requires valuation of the contracts based on the current market price.

OTC derivatives trade privately. Market prices for specific transactions are not directly available. This means current valuations rely on pricing models.

In current accounting argot, most derivatives are Level 2 assets (Mark-to-Model). In practice, this means that they cannot be priced based on quoted trade prices (Level 1) but are valued using observable inputs; for example, comparable assets or instruments or using interest rates, volatility, correlation, credit spreads etc that can be put through an accepted model to establish values.

This represents my personal opinion, not the views of the SEC or its staff.

I am not going to spend time here talking about how the price of gold is off-the-wall, that it is not just a bubble in the making, but a bubble waiting to burst. I don’t want to waste your time on that point.We all know it is a bubble.