Wars and Markets

Big Picture has a perceptive point.

...this points out why the decision to buy any size in RMBS, CDOs and even CDS was so problematic. The commercial and investment banks and funds that chose to invest in these “financial products” – difficult to value, thinly traded, non-uniform — was the root of the problem. That they happened to be so poorly constructed is almost besides the point. Its the non-existent market place for these hold-to-maturity securities. If you are looking for the underlying cause of why some arcane accounting rule is an issue, this is it.

This is why smart funds don’t buy beanie babies or Star Wars collectibles. Its hard to to justify the risk of owning hard to value, thinly traded, very difficult to sell items.

The banks made a poor decision: “Let’s bypass the broad, deeply traded traditional markets and instead create new markets for new products.” Not only that, but they dove headfirst into these markets in huge size. No one should be surprised that the net result was a flawed system of garbage paper, with too little room at the exits in case of emergency.

Not all that different from war-planning--you MUST have an exit strategy or you're likely to become toast when the rubber meets the road. Muscle alone doesn't do the trick--as the British learned here.

Ritholtz has a larger point, of course. That is, that there are all kinds of "markets."

Condemnation of all "markets" founded on the strategically-inept moves of banks in the last 5 years is not well-founded criticism.