If only more of the world's financial markets were actually markets
The Curious Capitalists spent last week visiting the Getty Center, the San Diego Zoo, and various other Southern California attractions. All the while I was getting bits of information here and there about the strange state of global financial markets, and feeling very out of it and confused. I'm still nominally on vacation today, but have no major excursions planned and am in a place (my Dad's house) with a reliable Internet connection. So I read the WSJ and the FT online this morning, and now feel slightly less out of it but even more confused.
The main impression I get is that nobody has the remotest grasp of how much trouble is out there, how long it will last, etc. Which explains why markets have been so jumpy, why banks have been scared of lending to each other, etc.
This would seem to be the natural consequence of building giant global financial markets on a largely over-the-counter basis. That is, the securities causing all the problems at the moment aren't traded on any kind of organized market with clear rules of conduct and disclosure requirements (U.S. stocks, which are, were up 0.4% last week). It's all make-it-up-as-you-go-along.
As you'll hear all the time from Wall Street and its partisans, this free-for-all encourages all sorts of swell financial innovation. They're surely right about that, but it also encourages all sorts of really stupid financial innovation like the sort that swept through the U.S. mortgage market over the past couple of years. And when the stupidity of a particular innovation begins to dawn on people, it can take months to figure out just how bad the damage is because there's no real market with regular trading and regularly posted prices on which to work things out. Then, when things get so scary and uncertain that the Federal Reserve and European Central Bank feel the need to jump in with barrels of cash, the stupid innovators get bailed out along with the smart ones.
So here's a thought, and it's not well enough informed to be more than just a thought: Maybe the world's central bankers should be doing more to encourage the creation of formal markets in all these weird new securities being traded around the globe. They could say ahead of time, for example, that when they do one of their periodic bailouts (liquidity infusions, if you prefer) they won't accept as collateral securities that don't meet prearranged standards of transparency, liquidity, etc. Investment banks would still be free to come up with strange new products to buy and sell, but always with the idea that if the things took off they'd eventually have to be moved to some sort of formal derivatives exchange or risk getting completely wiped out in a liquidity crunch like last week's.
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1
Doesn't work, because liquidity is fungible, and in any case central banks only lend to banks, not to hedge funds etc. And in fact the Fed did accept high-quality MBS collateral in its liquidity-injecting repo operations last week. But it didn't accept any old subprime junk, and there wasn't actually any demand for it to do so. After all, a repo is just a repo, not a real sale.
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2
Aren't you on vacation? What the heck are you doing blogging about work related stuff? Shouldn't you be drinking martinis or tanning or doing something cool? What is the point of vacation if you are just going to work away from the office?
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3
You are right, Yadgyu. It's just that this morning I was briefly considering going back on the clock, if things looked bad enough with markets. But they don't, so barring big news it's back to gins and tonics and the occasional vacation photo until next week.
As for Felix's comment: Okay, so my plan wouldn't work. I still do wonder whether there's anything to the idea of creating more incentives to bring these new financial products onto exchanges where everybody can tell what's going on and what things cost.
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4
Justin
Wasn't there some big utility stock snafu in the 1930s that led to restrictions on leveraged holding companies? And underpinning todays unrest with the financial markets aren't the sales of subprime loans in new packages roughly the same as those packages the holding companies assembled in the 30s?There appear to be many people in the market today that are in for the excitment knowing that the wind is and will be behind them. At least that is what they have been told and believe. There are others who sense that it is time to unload onto those suckers. Leverage works well with the wind behind you, but we may be in for some tacking.
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5
There appear to be many people in the market today that are in for the excitment knowing that the wind is and will be behind them. At least that is what they have been told and believe. There are others who sense that it is time to unload onto those suckers. Leverage works well with the wind behind you, but we may be in for some tacking.
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6
The markets are like Humpty Dumpty who sat on the wall and then fell and broke into many parts and nobody could put him together again.
Maychic.com -
7
The problem is that world financial markets like the stock markets are always manipulated to benefit the "money elite", international financiers and bankers, who secretly control all the world financial institutions.
For example when the media is screaming for people to sell a particular stock, the insiders are busy buying those stocks through their various agents all over the world, so the public are unaware of what is really going on.
And when they advice the public to buy, the insiders, the secret controllers are selling theirs. So the world financial markets are rigged and unfair.
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