What Actually Happened?

Bernanke says the problem at the heart of our recent economic problems was lack of regulation, not (heaven forfend!) Fed monetary policy. Interest rates, he says, were not too low.

Perhaps it wasn't interest rates — and, certainly, I'm not one to argue against greater regulation. The problem is that the financial instruments that brought on the crisis could not have been regulated because nobody knew what the hell they consisted of, or what they conceivably might have been worth. It's pretty clear that the ratings agencies that gave those instruments their AAA ratings didn't have a clue.

In other words, the crisis arose from a straightforward case of market failure, based on lack of information, and what really is needed is vastly more transparency. All securities should be sold on public exchanges, so that all buyers know what others are paying. Buyers should be fully informed of the content of the tranches of securitized debt they purchase, and not have to depend on the seller's optimistic evaluations of risk and reward. When banks hold such vehicles on their books, they should be valued according to real market prices, not imaginary projections of what they might be worth some day — and all of a bank's holdings should be on the books, not hidden away in SIVs.

If a regulator — the Fed, or anybody else — is going to make sure that banks no longer can become so grossly overleveraged that they threaten the world's financial structure, it is necessary to know all about their assets and liabilities. Secrecy (and creative bookkeeping) made the recent crisis possible, and only openness can prevent it from happening again.

And what can we expect from Congress?

My prediction: a little lip service to consumer protection, and a lot of kissing Wall Street's ass.

Leverage over Russia?

Well, it was a pretty dumb move on the part of Mikheil Saakashvili. I don't know what he expected to happen when he picked a fight with Putin, but he can't be all that surprised by how Russia responded. He should be even less surprised by how the West responded to the Russian invasion. Maybe Saakashvili figured the conflict was inevitable -- and probably it was -- but why he thought now would be a good time to get it going is beyond me.

Western Europe is totally dependent on Russian oil; the U.S. is preoccupied with Iraq and Afghanistan and economic meltdown, and Bush is a lame duck who's already blown whatever moral authority this country may once have had. So far, Georgia's had no support from the West save a few vague threats about taking the G8 down to G7 again. But wait -- the U.S. does have style="font-style: italic;">some leverage over Russia, come to think of it.

There's that little matter of the $100 billion we owe them. What if we threatened them with default?

Yes, yes, I know -- defaulting on a debt can wreak havoc on a country's credit rating. On the other hand, one could argue that repaying money owed to belligerent, aggressor nations who invade and occupy other countries only serves to encourage them. (Yes, yes, I know -- the description fits us as well as it does them -- but hell, they don't owe us money!)

Am I joking? Maybe -- but considering how much money we owe sovereign wealth funds and powerful corporate players in potentially troublesome countries around the world, why not take this opportunity to use our colossal fiscal irresponsibility to achieve world peace? Think about it -- crazy as it sounds, it might even work.