Nothing. No seriously, nothing. The recorded history of finance includes over sixty such crises, dating back to the disastrous devaluation of the aureus by the Holy Roman Emperor in 1622: approximately once every 6-7 years the whole western financial world blows up, and it's been going on for centuries. In the last 20 years this process has accelerated, going from the '87 crash to the S&L bail-out to the Tequila Crisis to the Asian currency crisis to the dot-com bubble to Enron to the subprime crisis. Mixed in there were the Tango Crisis, the Samba Crisis, at least one other South American dance crisis, and oh yeah, Long Term Capital Management came within a hair of starting a chain reaction that would have collapsed the largest banks in America in about three days. It's not a crisis when it happens every three years goddamnit, it's part of the credit cycle!
This can't be helped, as proved by G******-S**** (now that my readership has expanded I can't print their name and risk getting get sued) when they had the nerve to actually tell people that the current situation is 25 standard deviations outside what their models predict, admitting to being so bad at econometric modeling that a billion-to-one event happens every three years. This would spell ruin in any other industry: imagine a surgeon who didn't sterilize his instruments because he calculated infections as a freakishly event, who then rang up the local paper to tell them a billion-to-one coincidence had occurred and he'd killed 30 people in a week. He'd be in #@%$'ing jail, but nobody's ditching the big banks that all proudly announced they had no idea what the fuck just happened. It was years into the hedge fund craze before anybody checked the tax code and realized once the 2% of capital and 20% of return disappears down some hedge fund trader's open necked shirt, you have to pay the rest to the IRS as short-term capital gains, so it may be a few more years before anybody thinks that maybe investment models that just outright collapse on a triennial basis aren't a reliable, liquid investment.
Let me just emphasize that: in the half century following WWII Americans earned 6% + inflation investing in equities, which is actually not bad... the rule of thumb may be 10% but that's basically absent risk and recession. I'm not trashing the Street, in fact some of my best friends are holding tenuous positions on derivatives in the footwear market, however it should be obvious the market goes a little nuts on a regular basis. This cannot be stopped, because everyone is far too intimate and the triggers too small: as a recent book pointed out one man committed suicide in 1907 and the whole stock market crashed (yes, I'm far too lazy to dig out the paper and find the name again). Maybe you can get institutions to evaluate their risk better, improve models to consider that large institutions influence markets, and project returns over a time frame that includes a significant liquidity crisis. And then maybe the sense of panic that persists despite the repeated displays of resilience by markets and financial institutions.
Personally I doubt it, but you still have the time inconsistency problem, best illustrated by Jim Cramer's meltdown in front of Maria Bartiromo while ironically enough discussing Bear Stearns. Cramer's infamous 1000 yard stare rant about Ben Bernanke contained repeated pleas for the Fed to intervene to prevent the oncoming global financial crisis, which is pretty much what they always do. This is how we get into these situations, the Fed keeps anybody from collapsing, nobody gets chased down Broad Street and beaten to death by an angry mob, and the whole thing keeps going. The infallibility of governments is an ironic component of financial models: ten years ago the problem was that LTCM believed it was impossible for a nuclear power to default on their debt, and didn't take into account a vodka-soaked former communist about seven years removed from staring down tanks in the street. Speaking of that incident, the irony I referred to in Cramer's rant was that when the Fed Second District had a secret, quasi-legal meeting to discuss how everyone was going to band together and bail out LTCM, the lone hold-out was Bear-Stearns, whose ticker symbol is right under Cramer during his whole rant.
So the market, sometimes she cry she go boom. Diversify and deal with it. And get a $%#*'ing necktie. And tune in for part four of my four part series, in which I will address Amstelboy's big question: "How do we make a buck out of this?"
*-That thing about Bear-Stearns came from Roger Lowenstein's book "When Genius Failed", so sue him, not me.
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