From Arnold Kling:

So, my advice to Paul and Brad is this: don't start with a model that
focuses on investor beliefs about real economic variables. Instead,
start with a model in which financial firms use signaling to expand,
and the credibility of those signals increases over time as long as
nothing adverse happens. It should be easy to develop a model in which
signaling devices gain credibility slowly but lose credibility
suddenly. That will (a) produce the asymmetry between euphorias and
crashes and (b) tell a story that puts the fragility of the financial
sector in the middle, where it belongs.

This one was fun.  Excerpt:

Some economists — strict academics mostly–have long considered Roubini a quack. They
sneer at his approach, which is wide, deep, and deeply unconventional.
When he travels, for instance, he says his research includes talking to
"everyone from the airport cab driver all the way to the finance
minister." One prominent economist who studies recession indicators
recently slammed Roubini for his "subjective," "wild man" predictions
because they don't always rely on econometric modeling. And Roubini
certainly didn't help his case at an IMF conference in September 2006,
when he guesstimated the chances of a world recession at 70 percent
before offering, by way of explanation, that he had pulled the number
"just out of my nose."

It is now common in the left-leaning blogosphere to cite Estonia, its rapidly collapsing economy, and its earlier free market policies.  Sometimes the name of Dan Mitchell pops up as well.

I would add a cautionary note.  Recall for instance that Chile and South Korea and New Zealand also had collapsing economies, for a while (the early 80s for Chile and late 80s for NZ) but they rebounded because they were built on relatively sound economic policies.  The point can be made that they, like the Estonians, indulged in too much speculative excess but most Estonian decisions have been good ones.

Which Eastern European economy has suffered least from the financial crisis?  By most accounts it is Bulgaria.  Should we envy their economic policies?  Should you prefer the Bulgarian Way to the Estonian Way?

Which country has a future you would bet upon?

Etc.

What sweet words those are.  Here is the paragraph, from The Economist:

Matt King, an analyst at Citigroup, believes that the surge in
securitisation during the bubble can partly be explained by a massive
mismatch between the regulatory regimes of American and European banks.
Those American banks whose regulator imposed a leverage ratio had an
incentive to move assets off their balance-sheets. European banks which
operated only under a risk-weighted capital regime were able to buy
those very same assets because they attracted a low capital charge.
With risk weightings on the rise, and leverage ratios all the rage, the
capacity of European banks to purchase these assets is shrinking.

The broader question is to what extent the securitization model will make a comeback anytime soon.

Addendum: Arnold Kling comments.

Find it here, with this abstract:

The
'shadow banking system' at the heart of the current credit crisis is,
in fact, a real banking system – and is vulnerable to a banking panic.
Indeed, the events starting in August 2007 are a banking panic. A
banking panic is a systemic event because the banking system cannot
honor its obligations and is insolvent. Unlike the historical banking
panics of the 19th and early 20th centuries, the current banking panic
is a wholesale panic, not a retail panic. In the earlier episodes,
depositors ran to their banks and demanded cash in exchange for their
checking accounts. Unable to meet those demands, the banking system
became insolvent. The current panic involved financial firms 'running'
on other financial firms by not renewing sale and repurchase agreements
(repo) or increasing the repo margin ('haircut'), forcing massive
deleveraging, and resulting in the banking system being insolvent. The
earlier episodes have many features in common with the current crisis,
and examination of history can help understand the current situation
and guide thoughts about reform of bank regulation. New regulation can
facilitate the functioning of the shadow banking system, making it less
vulnerable to panic.

Addendum: Arnold Kling summarizes some of the recommendations:

1. Senior tranches of securitizations of approved asset classes should be insured by the government.
2. The government must supervise and examine "banks," i.e.,
securitizations, rather than rely on ratings agencies. That is, the
choices of asset class, portfolio, and tranching must be overseen be
examiners.
3. Entry into securitization should be limited, and any firm that enters is deemed a "bank" and subject to supervision.