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Best columns: Flexible fixers, Bubble indexer
The credit crisis is at a bad point, says Steven Pearlstein in <em>The Washington Post</em>, but the last thing we need is a &ldquo;strict adherence to economic orthodoxies.&rdquo; The S&amp;P 500 is &ldquo;effecti
 

A little flexibility, please

We’ve reached a “delicate point” in this financial crisis, says Steven Pearlstein in The Washington Post, where “even the usual cheerleaders have hung up their pompoms, consumer and business confidence has disappeared, and investors are driven mostly by fear rather than greed.” But now that we’re in this mess, we’ve got a new threat looming: “strict adherence to economic orthodoxies” by regulators and policymakers. It’s good that accounting and banking regulators have learned from this crisis, but they need cool heads and flexibility to fix it. “A financial crisis is not a morality play,” and what matters most is not the principles, but rather getting out quickly and with as little damage as possible.

The S&P 500 and its bubbles

With trillions of dollars linked to its performance, the S&P 500 is “effectively a stock-picker for millions of investors,” says Daniel Gross in Slate. As such, it has burned millions of investors. That’s because, due to the way companies are chosen for the popular index, the S&P 500 is particularly vulnerable to bubbles. The makeup of the index is always shifting—to be added, a company needs four consecutive profitable quarters and a market cap of $5 billion. So in the ’90s tech boom, “supernova” companies—grow huge fast, explode—dragged down the index a lot. This bubble has seen fewer “total wipeouts,” but with banking stocks out, belatedly, and energy phasing in, the S&P still has its “congenital bubble problem.”

 

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