Hi Frank -
Interesting comments, on complex subjects. One doesn't want to reduce things to sound-bites, but maybe some simplification is in order.
The present crisis is a consequence: an egg if you like, not a chicken.
Perhaps we can deal with the question of offshore institutions and their role later. The practice of hedging is both legitimate and widely-used (we've discussed how insurance companies, for instance, use derivatives). In the overview, the problem is that no one has been counting, because no one has access to all the numbers. Institutions have been lured past prudence (again) by the proffered cash carrot: it's the same as Enron, only different.
Now, central banks are frozen in fear, because they simply have NO IDEA what the risks are:
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"... Why did the subprime crisis take a turn for the worse recently?
Simply stated, the problem is that banks are unwilling to lend for anything longer than a few days. Things are particularly acute in the market for dollars..."
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"... Why are big private banks unwilling to lend to each [other]?
Clearly, they were worried about the quality of the assets on the balance sheets of the potential borrowers. My guess is that banks were having enough trouble figuring out the value of the things they owned, so they figure that other banks must be having the same problems. The result has been paralysis in inter-bank lending markets. Banks have not been able to fund themselves. And, as I will discuss in a moment, non-US banks faced an added problem – they could not get dollars. This was either because they could not get euros or pounds to then sell for dollars, or once they got their domestic currency they were unable to make the exchange..."
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The Art of Crisis Management: Auctions and Swaps
voxeu.org
Jim |
