Podcast: Play in new window
Never got to your main point because my internet connection died and there is now now slider to move into the presentation.
Previously in full screen mode I could jump in, but that useful facility has disappeared.
Please could you restore the slider bar?
As per any financial loophole, as long as a few people use it it remains a great loophole for those few people or corporations.
When everyone participates the systemic failure probablity starts going up. For example standard risk rating includes likelyhood of the event and impact of the event. As everyone participated in derivatives both likelhood and impact both increased in real financial system terms, as opposed to individual transaction terms ??!
What I found interesting was your comment on Basel 1 and how the Fed basically allowed this loophole from a capital requirements perspective and hence encouraged the entire disaster??
Dear Mr. Mystic:
For your listeners who may just be delving into the subject, I would like to toss-in another important function of “Futures Contracts” (lest the indoctrinates come-away thinking that it’s all simply some kind of “evil speculation” game). Real, ”first level consumers” of the commodities (that trade on the exchanges), use these contracts to ”hedge” in order to obtain a degree of cost predictability for input material. The ”Fat Cat Kitty Food Company” may consume 50,000 bushels of corn each year in their “Happy Pussy” line of cat food. If they sign a six month contract with Wal-Mart at a given price, they need to ensure their input costs are predictable (and preferably, fixed as much as possible).
Think of all the processed food on the selves of a modern market, and it’s easy to understand how important this “price stability” mechanism is to business and consumer alike. Airlines hedge fuel, ranchers hedge livestock feeds, manufactures hedge metals, etc. “Spot Markets” (“cash price today”) serve their purpose in the system, but they offer nothing in the way of a “price over time” stability mechanism.
Unfortunately, I spent may years working for a company that required lots of interaction with CFOs and Controllers (AKA – bean-counters). They are a different breed of folks (although in all honesty, I did occasionally stumble across some great people working in the profession). The running joke amongst our outside team was: Q. – “What is the most effective form of birth control for an accountant”? A. - ”Their personality”. It truly is amazing how much power these folks wield in a typical organization. They are omnipresent in conference rooms, and often hold veto power over much (if not most) project spending.
I don’t know why, but when I hear the word “derivatives” my mind wanders. Something about esoteric financial instruments that turns me off. Just seems like a fancy way of saying “unregulated gambling that will burn the house down one day.” So much time spent fine tuning weapons of mass financial destruction; time diverted from real production. Sorry, I guess I’m cranky today.
Seller removes risk from books, better class asset?
Those with the purchased risk, misrepresent the risk ( for all I know they probably turn the bloody risk into an asset)?
Hey presto, both win!
Goes tits up:Tax payer does the paying?
I am getting a little confuddled here.
“A study by Stephen Cecchetti at the Bank for International Settlements concludes that debt turns “bad” at roughly 85pc of GDP for public debt, 85pc for household debt, and 90pc corporate debt. If all three break the limit together, the system loses its shock absorbers.”
I must do a bit of thinking here. But as almost all money is created through debt, then in order for the GDP to grow, just a few mechanisms are possible
- more debt
- more velocity of the money
- net positive trading balance
So what do these guys think when they come up with “you have maxed out your debt”? They are indicating that it is “bad”. Well, OK, but to shrink it means that a depression is on the way and to increase it is also bad, and to maintain it is probably impossible. So where to next?
“But why did the credit bubble happen in the first place? You could argue that it is merely the flip-side of too much saving. The world savings rate has crept up to a modern-era high of 24pc of GDP. That is the most important single piece of information you need to know to understand the great economic drama we are living through.”
I have really no clue what he means. At any one time most of the money created will be sitting in an account. It has to. Stuck inside the banking system. So what are savings? When we hear “people are saving too much”, what does that mean? It the money was spent, it would end up in somebody else’s bank account as “savings”. Maybe what is meant is that the velocity of money slows down?
I guess there is a split to be made between private savings (not yet spent) and corporate savings (spent in, but not `invested` out).
There are the central bank’s savings also that should be thought of (China, Japan etc.)
And more confusion into the pot
Can we get gdp growth without increasing the debt pile? Can we even maintain gpd levels without more debt?
I have to go through that paper again, but the conclusion we need more savings is the exact opposite of AEP. There are clearly more than a few concepts and ideas that I have failed to grasp.
More debt would do it (or, as you say, velocity).
More savings, as a part of higher wages, may also be being talked of.
(but yes, the higher wages would have to come from higher borrowings)
>Can we get gdp growth without increasing the debt pile? Can we even maintain gpd levels >without more debt?
The answer to both of these is No. Not only that, we can’t have time continue forward without increasing monetary debt.
Perhaps the best way to begin contemplating how the monetary system works, is to put the interest equation into a graphing calculator like a TI. The just sit and think about the implications of living in a finite world on that graph.