Those trying to understand what's going on in the financial markets and financial institutions--the sub-prime mess and beyond--will find this interview very helpful. Paul McCulley is an economist and managing director of PIMCO, the leading debt fund manager. Read the whole thing if you have the time, but here are some of his views in brief.
Financial markets and institutions must be regulated because (as George Soros and others have previously said) the nature of these markets is to go crazy first in one direction and then the other. The granting of authority to banks to regulate themselves (in other words de-regulation) has been been a disaster. Instead, the Fed should have been extending its regulation to non-banks, as it has the power to do and is now about to do too late.
The carnage will continue and get worse unless the federal government steps in with taxpayer money to assume some of the risks. His portrayal of what's happening at the kitchen table and neighborhood level to drive headlines is very helpful. Abhorrent though it is to allow home "owners" who took zero-down loans to get their debts reduced in size, not doing that will be much worse for the equity their neighbors may still have. Chaiman Barney Frank is working on a bill to do this and other important things, but the White House and Senate Republicans are in opposition (and denial).
Investors fleeing collateralized debt obligations have gone into commodities (like oil and gold) in a big way, pushing those prices above sustainable levels. Commodities may be the next bubble to burst.
To see these views from a self-described optimist is pretty scary. Not quite Ann Coulter scary, but pretty scary.
BTW, as best as I can tell from looking at the PIMCO website, it does not invest in home mortgages or derivatives based on them. PIMCO manages at least one large mortgage backed securities fund. (Corrected 5/15/08.)