Hi pltodms -
"We are loosing control of the increasingly complex financial instruments that are being developed and that oversight is necessary to implement controls to prevent financial disasters from ensuing as we move forward, as the recent subprime crises demonstrates."
The pigeons are coming home to roost. Those institutions that moved hundreds of billions off the books (with CDOs, SIVs, etc.) are now finding it back on their books - and they don't have the capital to cover. Thus, they're forced to look elsewhere (Abu Dubai, China) for funds.
There's always a need for construction of imaginative financial vehicles.
The big difference between the world we grew up in as youths, and the present world is that the brutal lessons of the depression have been forgotten. The world of our fathers, where the president of the company made perhaps 5 or 10 times what workers made, where prudence guided the world of finance, where debt was backed by real assets, has been replaced with stratospheric remuneration (regardless of failure or success), the heady pursuit of bling, and an unremitting effort to stay one jump ahead of the rules. Underlying it all is the knowledge that if one "structures" the vehicle du jour appropriately, then a number of key players will get their palms crossed, sufficient to create the illusion of legitimacy and financial prudence, even to those who practise finance with the best of intentions.
Meanwhile, offshore conduits move trillions, again "off the books", where the Great Unwashed are unaware of the consequences.
Central bankers have been active participants in the financial legerdemain, and are now frantically trying to quantify their derivative exposure: exposure that goes far beyond sub-prime risk.
The ultimate guarantors of these excesses are governments themselves, which means that taxpayers (not central banks) are underwriting efforts to stabilize tottering financial empires through devaluation - while the perpetrators walk away, and at worst, their accomplices in the world of finance lose their bonuses.
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The Economist has a good article on the frauds of Ivar Kreuger, from which a quote is appropriate: (emphasis added)
'Once again, credit has ballooned and capital flits around the world faster than any human being can travel; those with the audacity to channel it where it is needed, as Kreuger did, can make unparalleled fortunes. And once again, financial innovation is moving faster than rules can keep up with it, which can lead to disastrous speculative excesses. Kreuger's story is a lesson in the dangers of excessive confidence, and fickle liquidity, that may be as relevant today as they were in the Roaring Twenties. As Galbraith, a scholar of speculative excess, pointed out when referring to Kreuger: “There is the dangerous cliché in the financial world [that] everything depends on confidence. One could better argue the importance of unremitting suspicion.”'
tinyurl.com
In these heady times, it's a legitimate question whether creating new rules can correct dangerous behaviour. It's now "devil catch the hindmost". One doesn't wish to be a prophet of doom, but there's a real question whether new rules will suffice unless the underlying psychology also changes, in this fin de siecle atmosphere.
Jim |
