A professor at the London School of Economics, Willem Buiter, posts a lengthy treatment of the current credit crisis on his blog, Maverecon (blogs.ft.com/maverecon). His conclusion: “The single best thing that could happen would be for the true magnitude of the losses suffered by banks and other exposed parties to be revealed.” Unless that happens, “fear of getting stuck with the hot potato makes banks unnaturally unwilling to extend credit against the kind of collateral that they would not have thought about twice accepting at the beginning of the year.”

At Marginal Revolution, Tyler Cowen uses game theory to show why banks might be unwilling to follow Mr. Buiter’s advice.

“Think of bank managers as being collectively averse to admitting a loss, if only because they might be blamed for that loss. So at first no one admits losses. Even though the market knows the losses are there, the market just doesn’t know exactly where. But then the market has no accurate valuations for some asset classes. Those asset classes can’t serve as collateral because just about any result—relative to an unevaluated base—could count as a loss and we’ve already seen that managers are loss-averse.”

Marginal Revolution reader Adam Nelson provides an example: “I think of it a lot like diseases that eventually become symptomatic, given enough time everyone will know, but until then, lots of people don’t want to get tested (and aren’t publicizing the results of their test). So most information travels on rumor.”

Mr. Cowen concludes, “The simple lesson is that bad news can be good news. … Once managers admit their losses, market liquidity can spring back to life and we can avoid a credit crunch. Once managers admit their losses, that is.”

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CHINA’S ECONOMY: SMALLER, POORER The following excerpt from an article published by Albert Keidel of the Carnegie Endowment for International Peace in Wednesday’s Financial Times has many eyebrows raised in the economic blogosphere: “The Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected [purchasing power parity] data revisions later this year, China’s economy will turn out to be 40% smaller than previously stated. … The number of people in China living below the World Bank’s dollar-a-day poverty line is 300 million—three times larger than currently estimated.”

Donald Luskin of Poor and Stupid (poorandstupid.com) says these “massive downward revisions … should make the U.S. protectionists happy to learn that the world’s most populous nation is poorer than was previously thought.” He continues, “Kind of shakes your faith in macroeconomic stats, doesn’t it? And in the IMF, too.”

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$222 FOR A PACK OF SMOKES Two law professors at Vanderbilt University, W. Kip Viscusi and Joni Hersch, recently published a working paper for the National Bureau of Economic Research claiming to estimate the true cost of smoking. Their research shows that although a pack of cigarettes goes for about $8 in New York, actually smoking the cigarettes subtracts $222 from the value of an adult male’s life.

Zubin Jelveh of Odd Numbers (portfolio.com/views/blogs/oddnumbers) breaks down the study: “Previous calculations of the personal economic cost of smoking have been between $20 and $30. The reason for the big difference between Viscusi and Hersch’s numbers and the past work is because of different accounting methods. The previous research assumed that the chances of dying only increased at the end of life whereas Viscusi and Hersch assume that smoking-related mortality risk exists—and increases—throughout life.”

Mr. Jelveh concludes, “So it seems in order to internalize the damage that smokers are doing to their future selves we’d need to put a further tax on cigarettes.” And how hefty would such a tax have to be? “On the order of 2675%,” he says.

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TRICKLE DOWN COUNTRY MUSIC… Merle Hazard, the country music bard of Wall Street, released a new financially themed music video (merlehazard.com) this week featuring a cameo appearance by economist Arthur Laffer of “trickle-down economics” fame. Mr. Hazard’s previous video, which was his first, was titled “H-E-D-G-E” and brought him national press and ranked over 36,000 views on YouTube.

“Country songs are about lovin’ and leavin,'” Mr. Hazard says. “Ain’t too many about equities, credit markets, and derivatives.” Well, not until now.

In his newest video, which is titled “In the Hamptons,” Mr. Hazard croons about the troubles facing mortgage bond traders summering on Long Island’s beaches. Before he breaks into the song, Mr. Hazard stumbles upon Mr. Laffer, who is best known for creating the “Laffer curve,” which shows that a low tax rate generates more revenue than a higher one. The theory was a basis for President Reagan’s economic policies.

“Arthur Laffer!” Mr. Hazard says in the video. “You used to work for President Regan and you drew that big curve. I’ve been wonderin’ lately, with the economy the way it is and the markets, it seems like there are some people hurtin’ and it’s really not their fault.”