Good tidings for the world! Pres. Barack Obama is on the right track in his efforts to get a handle on what is wrong with the global financial system. His latest pronouncements bear this out:

Obama Says U.S. Can’t Afford ‘Bubble-and-Bust’ Cycles

March 12 (Bloomberg) -- President Barack Obama warned a group of chief executive officers that the U.S. can’t continue with “endless cycles of bubble and bust” and must build a new foundation for future economic growth.

The financial markets crisis is only part of the challenge to the U.S. economy, Obama told the Washington-based Business Roundtable today...

Obama blamed the crisis on “reckless speculation and spending beyond our means; on bad credit and inflated home prices and overleveraged banks.”

‘Illusion of Prosperity’

“Such activity isn’t the creation of lasting wealth,” he said. “It’s the illusion of prosperity, and it hurts us all in the end.”...

(Pasted from Yahoo news)

The cardinal rule in resolving a knotty problem is to identify at the outset its root cause. One cannot provide an effective cure without his knowing what the illness is.

Illusion of prosperity is an on-the-money diagnosis. The bubble metaphor also aptly describes the current financial ailment. Sooner or later a bubble bursts; no bubble ever endures.

Common sense dictates that the best thing to do in this case is to stop creating bubbles or entertaining illusions of prosperity. Now the big question is: how do we do this?

To be able to answer this question, we have to understand how the bubble is created or to pinpoint the moment when illusion overtakes reality.

It appears that the bubble is created in the secondary, third, or fourth market rather than in the primary market.

If this observation is correct, we have to do something about it. This is the specific problem that economists should be concerned with.

We have to stop creating value that is merely perceived. This perceived value begins in the secondary market and gradually grows into an illusion of real wealth.

To restore the lost confidence in the banking system banks should not be allowed to deal in perceived values. Here is where regulation comes in.

Secondly, the precious deposits of ordinary citizens, or any depositor for that matter, should have 100% insurance coverage. Otherwise, bank runs will regularly upset our financial system.

This blogger believes these suggestions deserve further study.