Sodium Haze: Financial Crisis II - coming soon!

Tuesday, 7 June 2011

Financial Crisis II - coming soon!

As the Haze reported earlier in the week:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,”

Quite. The Haze is also forced to wonder just how much of the vast and impenetrable web of financial derivatives has yet to play out.

This unregulated trade is a huge financial experiment as it stands - nobody out there knows exactly how much has been speculated in total on the outcomes of debt, company default, soverign default, food prices, oil prices, house price bubbles and all the rest - but one thing is clear, it is still the taxpayer who will pay the price if parts of this experiment blow up again.

Tough talk of regulation has proved in the main to be just that - talk. 

Standard & Poors are happily trilling that some of the financial instruments that Warren Buffet called "financial weapons of mass destruction" are on the comeback trail.

Things like:

CDO's - 'Collateralised Debt Obligations"
RMBS- 'Residential Mortgage Backed Securities'
CMBS - 'Commercial Mortgage Backed Securities'
CDS - 'Credit Default Swap'

In the S&P report dated 14/2/2011 they state that

"All three asset-backed markets (CDO, CMBS, and RMBS) are expected to rise strongly in 2011"

- albeit from very low levels, but why are banks even being allowed to play with the same matches and kindling that nearly burnt the house down once before?   

S&P also reports that:

"CDOs recovered 373% in 2010 after declines of 90% in 2008 and 81% in 2009. Respondents expect issuance to rise 169% in 2011, which would still be a very low level by historical standards."

I am sure we are very glad that this trade is at a 'very low level' right now, because its historical high nearly blew the global financial system to kingdom come.

But just how much money is still sloshing around in the 'gambling economy' - a quick look on Wikipedia gives us a very very very big number.

The total notional amount of all the outstanding positions at  2009 stood at $615 trillion. 

Nothing to worry about there then!

Incredibly this astonishing global betting ring was supposed to make the financial markets LESS risky.

But analysts and investors such as Warren Buffett and the IMF's former chief economist Raghuram Rajan warned that derivatives increased risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification.

Raghuram Rajan also said that the god-like emperors of the financial services industry had NOT found a magical way to make mega-profits with low risks - they had in fact found a way to get mega short term profits at very high risk.

We are assured by government officials, politicians and bankers that the crisis days of 2008 are behind us - but are they?

What has changed?

Have the derivatives gone away? No

Are the derevatives regulated now? No.

Is there an effective seperation between commercial and retail bank operations? No.

Has the greed and the bonus culture changed? No

Andrew Painter writing in the New Stateman doesn't cheer me up much...

We have an economic and financial system that is inherently uncertain and crisis-prone. We remain in the midst of a crisis that has gone from sub-prime mortgages to global financial crisis, to global recession, to sovereign debt crisis, and could yet become an even more ferocious debt and financial crisis.

and he rightly points out that Eurozone nations following the usual mantras of the IMF might be just the spark that lights a new blaze

Greece, Ireland, Portugal and perhaps Spain are trapped, insolvent and capable only of a fiscal masochism that ultimately makes the problem worse as national income suffers as a result. And the whole time, the system remains fundamentally unchanged.

and things are worse this time around if you think about it as nations like the UK just don't have the funds to bail out the banks again.

We are already exposed to £1.5 trillion of risky 'assets' (dodgy loans) of UK banks we 'protected' as part of Gordon Brown's 'saving of the world' in 2008. Just how many bank gambling debts is UK PLC good for?

The homegrown UK financial timebombs might prove to be irrelevant anyway - a financial tsunami may yet engulf us from Europe...

...or Peak Oil might be the torpedo that sinks the unholy ship 'Fractional Reserve Banking' forever and all our current accounts and house prices with it.

I am no in way assured that our insane and unsustainable financial system can lurch on like this much longer. We need our politicians to act NOW to avert an all too predictable financial collapse in the future.

The suprised expressions and hand wringing of politicians was perhaps understandable once around the track - but they will not be forgiven for failing us twice.

If we are indeed facing another financial meltdown soon as many predict - then I hope that the politcians and regulators that are failing to act now face the same justice as the former prime minister of Iceland.

Geir Haarde is being put on trial for criminal negligence, so should they.
BLOG DIRECTORY, Submit blog free, Promote Blog, Best directory