Even though all the signs were there, yet even professional managers disregarded them. The Financial Times’ John Gapper asks the question “Why did they fall for it?” in “Bargain hunters see profit in panic” The investors thought he had “an unfair advantage” (knowledge and connections) as a Wall street insider (and former Nasdaq chairman). Gapper postulates that (1) people got used to double digit returns, hedge funds were proliferating and Madoff was “offering something comparatively modest and reassuring” (relatively conservative?), and (2) advisers, who invested their own money, provided privileged access to Madoff “a skilled veteran of financial markets who had such old-school values that he did not charge hedge fund-style fees.”

In the Financial Times’ “’Helicopter-Ben’ confronts the challenge of a lifetime” Martin Wolf looks at the options available to the Fed and fiscal authorities to forestall deflation (and why deflation is highly undesirable) once interest rate hits zero. The options are unlimited (especially with ‘fiat money’ or the printing presses): drive down long term rates as well, “lend directly to private sector”, increase size of government, “run deficit of any size”. The challenge however is to reverse the process once deflation has been averted, without suddenly creating higher inflationary expectations. Mr. Wolf thinks that “the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence.”

Another great read in the Financial Times this week is Niall Ferguson’s “Global economy: The age of obligation” in which he searches for solutions to the current financial crisis in the Bible (Deuteronomy) where in the Jubilee year there was “a general cancellation of debts”. He discusses biblical and post-biblical precedents where this was contemplated and/or done. (By the way, for those of you who are history buffs, you might be interested in Ferguson’s excellent book entitled “War of the World”.) Historically excessive debt (the current problem) has been reduced by: default (chosen by many individuals), restructuring/bankruptcy (chosen by potentially growing number of corporations), inflation (not a short term problem) or conversion (mortgage debts converted to long-term fixed-low-interest loans). Ferguson says that conversion may be a workable solution even if it wasn’t a complete debt repudiation. (Interesting thought)

The Barron’s interview with the respected finance thinker Rob Arnott “How to play a ‘Take-No-Prisoners’ market” reveals Arnott’s thinking on how to approach the current market carnage. He continues to be a believer in fundamental indexing (even though it has not done well in the last couple of years). He suggests “not investing with the eyes in the rear-view mirror” (Treasuries ride will be over soon). Instead suggests considering assets which have “been hit really hard” (convertible debt, TIPS, emerging market stocks and bonds). He by the way forecasts 8% long-term return on U.S. equities (3.5% from yield and 4.5% from growth), but he thinks that many investment grade corporate bonds will do better than the corresponding equities, given current bond pricing. He continues to believe in indexing and “too much of the hedge-fund community is still a wealth-transfer vehicle from client to manager” (because only the best managers earn their fees and most of their funds are closed.)

And finally in Sara Silver’s WSJ article “Uncertainty weighs on Nortel” , she suggests that despite Nortel’s apparent abundance of cash ($2.6B) and no debt due until 2011, bankruptcy is being contemplated sooner rather than later due to “continuing erosion of business conditions”, limited availability of financing in bankruptcy, a means of reducing cash burn rate (including required major pension plan expenses in the coming years due to massive underfunded status of plans) while there is still ample cash to try “to preserve the company”. (This does not give a warm and fuzzy feeling to Nortel pensioners.)