Heads - I win, tails - you lose

I read an interesting book, "The Return of Depression Economics" by Nobel laureate Paul Krugman. I found this book very readable offering a explanations to those events I really never understood when following the world news with investor eyes during the last 15 years.

I think he is right on by claiming that moral hazard is central stage to the bubbles that eventually bust with more or less devastating effects. As he says that anything that performs banking functions and is so crucial that it has to be bailed out in times of crisis, then such an entity also have to be regulated like banks. I think this is good advice for the future. Free markets are all good and true until somebody can play the game described in the header on a massive scale.

The catch is - it is not very easy to see which entities perform banking functions, that is entities borrowing from some and lending to others and trying to make a profit in between (by taking more risk) and at the same having to be able to satisfy the liquidity needs of the creditors for the market mood not to go haywire. These come in all shapes and forms and will, most likely, not be recognized in time until they pop.