Recommended Reading: March 26, 2008

Larry Swedroe, Principal and Director of Research of BAM Advisor Services, explains why a bear market is a necessary evil. “The bottom line is that bear markets are necessary to the creation of the large equity risk premium we have experienced. Thus, if investors want stocks to provide high expected returns, bear markets, while painful to endure, should be considered a necessary evil.”

The Economist
has a great summary of what went wrong in financial markets since the 1980s. “Modern finance has promised miracles, seduced the brilliant and the greedy—and wrought destruction.”

Up to 1000 hedge funds may sink in the current market turmoil, says The Australian newspaper. The ease with which hedge funds were set up while the market was strong had created a number of players who would not survive the current downturn. “If you lose 500 or 1000 (hedge funds) it’s not really the end of the world, because as the hedge fund universe has expanded one has to say there has been a dilution of the quality,” said HSBC’s global head of hedge funds, Patrick Tuohy.

Several journalists are writing about “the end of free market capitalism” after the Fed’s bailout of Bear Stearns, but Martin Wolf’s commentary stands out. “Remember Friday, March, 14 2008: it was the day the dream of global free-market capitalism died,” he says in a Financial Times column. “Deregulation has reached its limits.” He looks at the wider implication of the Fed’s bailout: “If the U.S. itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the U.S., with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?”

And lastly, The Onion has a different take on on the JPMorgan / Bear Stearns deal. “JPMorgan Chase Acquires Bear Stearns In Tedious-To-Read News Article