To: Knighty Tin who wrote (34998 ) 11/1/1998 12:50:00 PM From: Tommaso Respond to
It's true that I don't have any idea what Vilnis was talking about when he said that the cost of living was the same in 1941 as in 1790. From time to time I have seen studies and charts that tried to take basic things like the cost of a loaf of bread or of a shirt or of a rented room, and measure them against the price of silver or gold, so as to get some idea of how much income was absorbed by bare necessities.The most recent off balance sheet financing mania is derivatives. The regulators have not required that reserves be set aside to cover the risks assumed. The argument goes something like this. If we have one client that is long the British pound and another client who is short the British pound, then the full amount of the risk that the pound will go up or down is borne by one or the other client. We therefore do not need to set aside any reserve for the risk we are taking as a bank since we are only facilitating the transaction as an intermediary. The bank regulators have bought into this logic and currently there are virtually no reserves to meet the potential future loss from counter party default risk. What has been totally ignored is that when one or the other party defaults on half of the transaction, the bank will be asked to make up the loss to the other side. The bank is extending its credit when it acts as the intermediary and will be called upon to pay up when one side defaults. There are at least three trillion dollars of such liabilities assumed by the NYC money center banks. If just 10% of the clients default, that would more than wipe out all of the money center banks' capital. It is not difficult to script a number of situations under which this could occur. That is what is different this time. That is why the Federal Reserve has bailed out Long Term Capital Management LP and that is why interest rates are being dropped. There is a significant systemic risk for which there are no adequate reserves.
