The incompetence is what I find most annoying. As The Goldman Sachs Group's (NYSE: GS) chief economist said in the New York Times, the Super SIV announced yesterday is "a PR move." The reason is that if the securities backing the Commercial Paper (CP) are truly undervalued, then the banks should be able to buy them cheaply and profit when the market realizes its mistake.

That's where Bernanke's exclamation comes into play. Nobody knows what those subprime mortgage backed securities (MBSs) are really worth. As I've posted before, they were sold on the basis of AAA credit ratings but now that the default rates on the mortgages are rising, it seems that none of the investors who bought the securities can estimate their future cash flows. And without that ability to value them -- one of the most fundamental concepts of finance -- the securities are essentially worthless.

So what is the solution? I think it's time for MBS owners to remove the golden wrapping paper and make an honest reckoning of the financial toxic waste on their books. This will cause massive capital write downs and a global credit crunch. After that, it will be time to fix the system that regulates these markets -- which I think should be guided by two principles:

• Transparency. I would appoint an independent group -- e.g., one not paid by the people who create the securities as we do now -- to assess the value of the future cash flows of asset-backed securities. If those cash flows cannot be assessed, then the securities cannot be traded. If they can be assessed, then the values and the underlying assumptions must be made public in real time. This principle will slash the size of the market but keep honest the portion that remains.
• Equitable compensation. Participants in the system that originates, packages, sells, lends to and invests in asset backed securities can keep getting their big bonuses. The only change I would make is to put those bonuses in an escrow account for 10 years. If the securities maintained their worth over the 10 years, market participants would be able to take their money out of the escrow account. If the securities became worthless, the escrow account would be used to pay off the buyers of the securities. This would make market participants think twice before they extend credit to people who can't pay back their loans.

Do I think any of this will happen? Not in this administration, which will try to boot the problem into 2009, but perhaps in the next.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.