Toxic tips from D'Oh School of Economics

PLATFORM:BREAKING NEWS: Homer Simpson has been operating the controls of the international financial system for the last several years. Mr Simpson, normally the animated nuclear safety inspector at the Springfield Nuclear Plant, is known to spend much of his time eating doughnuts, spilling coffee on the control panels and falling asleep.

Financial watchdogs from America to Europe have been enticed by, and trained in, his devil-may-care management techniques at the D'Oh School of Economics. Simpson's influence in economic circles is most obvious when regulators are listening to investment executives valuing their products.

When the small talk turns technical, a speech bubble appears above the financial speaker's head saying: "Blah, blah, subprime, blah, blah, repackaged, blah, blah, bad debt, blah, by another name".

Soon after, the bubble dissolves and the D'Oh regulators nod, stamp "Approved Investment" on the paperwork and go back to sleep at the controls.

Only in Homer's cartoon world could it be possible for investment professionals to take bits of this and that - lint from Homer's belly button, drool from Moe's face and dandruff from Principal Skinner - call it some weird name and sell it for a tidy profit. Right?

This "repackaging of rubbish for sale to the suckers" is what happened in the non-animated world over the last few years and it's no laughing matter.

Investment companies needed to satisfy an increasingly hungry market so they invented ever more complex financial products. Although the new investments probably looked viable in theory, it's unlikely that even their inventors were certain of their daily value. (Would you know the value of a Porsche constructed using parts from an old Lada, a Ford Pinto and a Yugo?)

No one really understood how these derivatives were valued but they were too afraid to ask. Whether it was a conscious decision or not, these complicated products were certainly a good bet on human nature: nobody wants to be the guy in the room who says: "what does that mean?" or "I don't understand".

The world's most famous investor, Warren Buffett of Berkshire Hathaway, wasn't taken in by the slick talk. He's a simple guy and only invests in what he understands. He said: "I don't see any way that pooling a bunch of mortgages, changing the ownership, is going to change the viability of the mortgage instrument itself - whether people can make the payments or not."

Jargon and techno-speak have the power to weaken our common sense filters and, in this financial meltdown, they contributed to uninformed - even dangerous - decisions by professional investors.

Ordinary people like us are the ones who will pay the price for this toxic thinking even though we can't fully comprehend it yet.

No one seems able to explain what happened, why it happened and where we are going next, so we're entering a nuclear winter of terminology. Simpsons-like phrases used by news organisations include: toxic debt, financial Armageddon and several other atomised terms.

Earlier this week, former Bank of England policy maker Willem Buiter even said that British prime minister Gordon Brown needs to approve a "toxic asset dump" to rescue the British banking system. "There should be a toxic asset dump in which public money is used to buy the toxic assets of the banks, but not at prices that imply a significant no-strings-attached transfer of capital to banks," Buiter said.

Basically, the British government should follow the US model and give taxpayers' money to the banks in exchange for bad debt? That's a bit like a teenager asking mum and dad to take responsibility for their credit card bills when the debt collectors call.

Now is not the time for procrastination or inaction by investors. Franklin Delano Roosevelt was president during the Great Depression. In 1932 he said: "The country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something." Investors who keep their nerve will see the silver lining. For years, Berkshire Hathaway stayed out of the market. In 2007 it started to spend. This mess is an opportunity for savvy investors to stop talking rubbish and start buying what they understand.

• Margaret E Ward is a journalist and managing director of Clear Ink. She worked in the marketing department of Lehman Brothers in the mid-1990s. margaret@clearink.ie