Reply #35: Derivatives bring drama to Davos

[54anickel]

http://www.ft.com/cms/s/eae38d36-b198-11db-b901-0000779e2340.html

As Stephen Roach, chief economist at Morgan Stan-ley, moved around the debates on the world economy in Davos last week, he admitted that some of the discussions were distinctly bland. With the world economy growing steadily, de-bates about big economic themes lacked real drama.

However, in one area there was a raging debate: the role that the fast-growing derivatives sector may, or may not, be playing in distorting the cost of credit.

"We have just had a pretty lively discussion," Mr Roach said at a lunch to examine derivatives, attended by senior policy officials, economists and financiers. "In fact, this has probably been the fiercest argument I have had in Davos."

A cynic may suggest this reflects the fact that the global economy is so benign that policymakers now have the "luxury" of worrying about financial markets and esoteric instruments, as John Lipsky, the first managing director of the Internal Monetary Fund, put it.

snip>

Meanwhile, the issue of legal authority poses a dilemma, as Stanley Fischer, governor of Israel's central bank, noted. For while banks such as the US Federal Reserve managed to quell the crisis at Long Term Capital Management in 1998, markets are now so international in scale that they cannot easily be controlled by any single authority. That made it hard to gather data in the short term but it also made unclear who had res-ponsibility for the system in a crisis, Mr Fischer said.

snip>

Howard Davies, former head of the Financial Services Authority and now an academic, said: "We all know that the reality of the financial markets is that risk is being parcelled up and paced around. But international regulatory architecture is still organised as if the world had not changed. As a result, we have a regulatory architecture designed for a bygone age."

more...


I think I posted this earlier in the week from a different source, but it ties in nicely with the above. Pardon the dupe. "Stop me if you've heard this before".

BANKERS WARN OF IMPENDING FISCAL CRISIS
by Dr. Chris Martenson
The End of Money
January 30, 2007

http://www.financialsense.com/fsu/editorials/martenson/2007/0130.html

This past week, Ben Bernanke warned the US Congress that our nation faces a ‘fiscal crisis' if the out of control spending habits of Washington aren't soon curbed. I suspect he used the word ‘curbed' quite deliberately as the politicians starting back at him probably looked like a row of dogs listening to white noise. Can't you just picture it? A bunch of congressional heads all tilted to the side with studious expressions on their faces, but a stylized question mark floating in a little text balloon over each of their heads?

As the author Upton Sinclair famously remarked; "It's difficult to get a man to understand something, when his salary depends on him not understanding it."

Which is a fancy way of saying that roughly zero congressmen "understood" what Bernanke was saying, although at least a few probably possessed the requisite intellectual candlepower to ‘get it'.

Bernanke began his testimony by restating what we already know:

1. "Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the administration, and the American people," Bernanke said.

2. "However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he added.

Breaking out our handy-dandy central banker decoder ring we can decipher his statement as follows:

"You guys are gonna have to either break your past entitlement promises and face an angry electorate or you're going to have to raise taxes to hurtful levels and face an enraged electorate".
"Unless you do one (or both) of these things, the future looks mighty bleak".

more...