by Daniel Costello

L. Gordon Crovitz, the former Wall Street Journal publisher who Mr. Murdoch booted soon after buying the paper, writes an occasionally interesting column for the paper's opinion pages called "Information Age."

Today, he writes about a recent interview with Harry Markowitz, a Nobel Prize winner who came up with a popular but controversial theory of how to diversify investment portfolios that reduce risk and maximize return.

Since the recent financial storm has a lot to do with investors who allowed just a wee bit too much risk into their investment wallets, some wisdom from Markowitz is probably worth consideration right about now.

 

The Nobel winner's main point: the underlying problem of the current financial crisis is continued lack of information and transparency about the value of mortgage backed securities the whole world seemed to get drunk on in recent years. He advocates doing the homework to find out that information, even if it means scrutinizing millions of individual mortgages that back the securities down to the zip code.

That would take a lot of work and up to a year, he estimates. But "just as with all securities, the fundamental exercise of the analysis and understanding of the trade-off between risk and return has no shortcuts," Markowitz said in a related essay Crovitz highlights.

In short, Markowitz is saying the bank bailouts may be addressing market liquidity but not the underlying cause of the problem and therefore may not be as effecting in the near or long term as advocates hope. Interesting food for thought.