“We need to restore confidence in the markets’ basic ability to function, not in their presumed tendency to make us all rich by always going up.”

France’s Sarkozy provided a similarly elegant dose of adult thinking in his comments (from Times of London) on the SocGen troubles:

“The point of a financial system is to lend money for economic activities which, in turn, generate profits. It is not to go and speculate on different activities which create enormous flows and profits in a few hours.”

Two words: Northern Rock. The scheme you propose is actually well known (it is known as co-insurance) and is applied in a number of countries, including the United Kingdom. The problem is that it has now been shown to encourage bank runs, since it makes it rational for depositors with deposits over the threshold for 100% insurance to pull their money out of the bank at the first sign of trouble.

In your example, that would be all depositors with more than 10k, which are evidently more numerous that those with more than 100k (the current FDIC insurance limit).

Check the posts and comments about Northern Rock on http://calculatedrisk.blogspot.com/ for more info.

NB: I initially failed to understand the perverse incentives provided by the UK’s deposit insurance scheme and how it promoted the run on Northern Rock. Calculated Risk made me see the light!

Maybe 100% for first 10k, 95% for next $90k, 90% for next $100k and 80% for next $300k.

What the hell is that moron saying there?

When I hear people saying the stock market is crashing or wondering why The Fed was over-reactive it does seem in a word, retarded, where I think Gentle Ben’s eyes must have rolled into the back of his head and then popped some connective tissue that short circuited, because all you have to do is look at a chart:

http://finance.yahoo.com/q/bc?t=1y&s=%5EGSPC&l=on&z=m&q=l&c=&c=%5EIXIC&c=%5EDJI

The index is down about 7% and The S&P500 is still at least 5% overvalued in terms of fair market value related to a 10 year Treasury.

What the hell is the reason behind people thinking that the stock market is in a crash> Yup, housing bubble excess is helping to restore some sanity to a bubble that needs to be popped but the overvaluation of the asset bubble in regard to stocks, is just hype! I hate to quote Bush in any positive way, but the economy is not crashing (therefore I guess he thinks its doing great…Hmmm?). The simple final issue is that the housing bubble has at least another year to readjust down and probably values will go down another 15% in places, and stocks will go down maybe 10% and GDP will fall and it will be ugly, but its not the end of the world — unless we have The Fed and Bush add more chaos fuel to the credit fire and try to inject too much cash into the derivatives market…that where the retarded part comes in!

The housing implosion is freeing up resources which currency adjustment will draw towards tradables. There’s a good chance of a relatively mild recession which facilitates dramatic improvement in our international competitiveness IF we start weaning ourselves from our over-reliance on fiscal stimulus.

The most serious risk at the moment is an accelerating debt-deflation process which idles productive resources in response to accounting standards which tell companies to start crying poverty because there has been a big drop in the market value of some of their securities holdings. That’s a bit like being forced by accounting rules to sell your fully paid off house simply because your neighbor lost 20% on his house sale last week.

By all means lets get more realistic about credit standards and risk spreads,etc. but lets not stampede ourselves into a panic.

I would be interested in seeing your thoughts on Frederick Feldkamp’s November 5, 2007 public comment letter to the Federal Reserve criticizing a number of policy decisions by the Fed on mortgage and corporate securities and derivatives. Yesterday, Barrons highlighted a couple points from the letter, but didn’t print it.

I’d also like to read the letter.

Thank you. Sorry to be off topic.

Looks like a great read; have pulled it up and will get to it later. Thanks.

Janzen argues that America’s economy now depends upon Bubbles created by the Finance Insurance and Real Estate sectors of the economy (FIRE), where before the dot-com era they had been a relatively rare occurrence.

His bet is that the alternative energy sector is the next Bubble-in-the-making.