Financial markets evolve, and the markets we have today are the product of centuries of evolution. The people who run the markets -- marketmakers -- would have us believe that today's markets are the best of all possible markets. Indeed they are, but only for those who have guided their evolution -- the marketmakers. For those who want liquidity at low costs and with no excess volatility, today's designs leave much to be desired.

"A New Foreign Exchange Market Design" tries to eliminate excess volatility in foreign exchange markets by setting exchange rates in an auction open only to fundamental traders -- those engaged in international commerce and direct investment -- and then making those fundamentally-discovered exchange rates available to anyone who wants liquidity, including indirect investors and speculators. The speculative traders do not affect the exchange rate; rather, the balance of their trades affects the money supplies and/or international reserves of the two cooperating central banks. (The central banks decide between themselves how they want to absorb the imbalances, but speculators can never break the banks -- since the South African Central Bank, for example, can never run out of rand, and the Bank of England can never run out of pounds, an agreement between them to set the rand/pound exchange rate is unbreakable.)

"A Stock Market Crash?" takes a look at the prospects for a crash in the US stock market, but since the analysis applies a general model of market crashes to current US conditions, there's more to it than meets the eye.

Take a look, and let me know what you think!

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