EDITORIAL: “Surviving the markets: The new financial order is undergoing its harshest test. It will not be pretty, but it is necessary,” The Economist, 18 August 2007, p. 9.

No real comment to offer, other than it’s a sensible summary of the challenge.

We’re always waiting, as the article starts out stating, for some terror strike or state bankruptcy or oil shock, when--on average--all that stuff simply gets lost in the usual noise of the financial system’s growing complexity and the shocks it inflicts on itself.

We have been securitizing debt in so many forms in recent years, making it all so tradable with little sense as to where that innovation was going to take us.

I mean, hard to argue with the results of the global economy in recent years, but just as clear is our deficit in rules for these new innovations. The assumption has been that if you securitize debt and make it portable in market terms, the global economy can spread risk more efficiently instead of letting it pile up in one market.

In theory, a great idea and it probably works just as advertised, but with all such innovations, there is that sense of “be careful what you wish for.” Unintended consequences are guaranteed with anything so vast and so complex.

By definition, any such innovation leads to some going too far out on limbs, so the crisis involves their losses and the system’s overall migration to some more acceptable level of risk acceptance.

So the debate, as always, seems to be how much central banks should step in to save financiers who screwed up. The moral hazard clause tends to get tossed out the window when the financial health of the markets is perceived to be placed at risk, and then, with this crisis, there’s the populist instinct to save the little guys (far more legitimate).

So it’ll be interesting to see what the Core as a whole decides is the new rule set on this one. The “success” or “failure” here has less to do with the level of pain than with the speed of recovery and the behavior altered as a result.