So, what’s up with the economy?

If you don’t know, don’t feel bad. Despite my best efforts, I can’t explain what’s going on either. David Leonhardt wrote a piece in the NY Times yesterday telling us not to feel so bad:

Raise your hand if you don’t quite understand this whole financial crisis … I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

You’re right David, that’s not very comforting. But since you’ve broached the topic, it may just be that our economic crisis has much to do with the fact that our economic gurus have created a Byzantine financial structure that not even they fully understand. Roll The Economist:

Entanglement is a new doctrine in finance. It began in the 1980s with an historic bull market in shares and bonds, propelled by falling interest rates, new information technology and corporate restructuring. When the boom ran out, shortly after the turn of the century, the finance houses that had grown rich on the back of it set about the search for new profits. Thanks to cheap money, they could take on more debt—which makes investments more profitable and more risky. Thanks to the information technology, they could design myriad complex derivatives, some of them linked to mortgages. By combining debt and derivatives, the banks created a new machine that could originate and distribute prodigious quantities of risk to a baffling array of counterparties.

I’m not qualified to critique the Fed’s prodigious rescue of Bear Sterns. What I will say is that perhaps regulation would prevent these sorts of shenanigans from occurring in the future. That’s a hint to the presidential candidates…