Whom to trust?

Many months back, I wrote about the central issue around the financial crisis was one of trust. Until trust is restored, the gears of the financial system remain jammed. Most of the current activities around restoring market confidence have been about ensuring that there is adequate money supply however; this has not really been the central issue in this meltdown. If anything, the current solution will likely lead to inflation down the road. The central issue is not the supply of money but the velocity of money. It’s not moving and it’s not moving because it is difficult to ascertain who is credit worthy.

The here’s an article about the notion of quarantined assets in order to isolate toxic assets. Not sure about the mechanics of this but it’s an interesting idea. The moral hazard issue remains unresolved.


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