Anyway, the piece that started me off on this post was first found, I suspect, in the FT. It is this short number from a pair of economists publishing under the Banque de France, and is about the way small losses spiral into bigger systemic problems, Liquidity and financial contagion. The paper is useful in how it highlights the evolving models of banking crisis through time; from "one bank topples another and so on" to "market instruments falling in value causing capital requirement rules to cause further selling" . In other words, banking cap requirements make demand curves slope UP.
It then leads me onto an interesting speech with useful exhibits from the Fed of New York, "May you live in Interesting Times". Look in particular at the defaults on residential mortgages in the US: British figures are clearly nowhere near this.
However, worth quoting the point of this:even if subprime delinquency rates keep climbing to unprecedented levels, it seems likely that total losses will be roughly in a range of $100-200 billion. Although this is a lot of money, it pales next to the $58 trillion of net worth of U.S. households or the $16 trillion market capitalization of the U.S. equity market. To put these losses in perspective, a 1 percent gain or loss in the U.S. stock market—which often occurs on a daily basis—is about the same order of magnitude of the likely subprime mortgage losses that will be gradually realized over the next few years.
The article/speech pulls no punches in terms of analysing the crisis in its full complexity and granularity - a useful future reference.
From there, to a Bernanke Speech in Jackson Hole last year. Bernanke's interest ought to be double, as a scholar of serious repute as well.
The US has economists in a different league from ours - recently reading Knowledge and The Wealth of Nations by David Warsh, on the essential topic of Increasing Returns in Economic Growth (another reason just letting things alone does not work), really emphasised this for me. I will try to read everything by Brad deLong, and this piece on Adverse Selection in mortgage markets is an example of the thought he can provoke. It is nice when they don't assume you can't do basic maths.
The FSF's piece on making things more robus is good (here) as another introduction to the whole affair.
Finally, for here, the 10 recommendations from arch-Bear Roubini for how to fix finance are as good a robust intro to this mess as I have found, I think**. The fact of these shadow-banks not being fully regulated (because no High Street depositors), but needing it because of the systemic risks, is an important one. Also pointing out how banks did have 'skin in the game'; after all, they are wearing some big losses. And reducing the pro-cyclicality of capital requirements, and a real criticism of mark-to-market accounting, while recognising the discipline it brings. Plus how standardization brings liquidity (look at the British Financial Revolution of the C18)
My challenge is going to be to bring this into a political context. Are there specifically right- or left-wing answers? Are some more meaningfully liberal than others?
*OK, I know this is not the definition of libertarianism. But this belief and the accompanying view that government interference necessarily makes things worse is a strong part of the political view
** Apart from this of course
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