[lbo-talk] Is This So?

RE earnest at tallynet.com
Wed Jul 5 15:32:35 PDT 2006


What got my attention in Cockburn's column was this:

"The Bank for International Settlements is no circus-tent Cassandra shrieking about the onrush of Doom. Bankers don't shriek. But here's the BIS, trembling before its crystal ball and talking, in its most recent annual report, about "planning for the worst. Consider first a discrete event which, if it occurred, would disrupt financial markets. What might be done in advance to prepare for such an eventuality? One important step would be to ensure the integrity of domestic lines of communication among core financial firms, their supervisors, the central bank and the operators of systemically critical parts of the financial infrastructure. Another would be to ensure similar openness at the international level. Stress testing is now almost universal in financial firms, which is highly desirable. Yet stress tests are based on simplifying assumptions that necessarily fail to match the complexity of real world events." That's a banker's way of saying, "The show could blow up tomorrow, and there may not be any way to stop it."

Does this indicate an unusual level of concern on the part of the BIS, or is Cockburn cherry picking their report?

Randy

----- Original Message ----- From: "Doug Henwood" <dhenwood at panix.com> To: <lbo-talk at lbo-talk.org> Sent: Wednesday, July 05, 2006 2:59 PM Subject: Re: [lbo-talk] Is This So?

On Jul 5, 2006, at 2:34 PM, Michael Pollak wrote:


> Fair enough. Cockburn is no economist and clearly this is just
> stopped-clock crisis mongering. If there is a serious downturn,
> you don't get any credit for predicting it if that's all you ever
> predict twice a year for decades.
>
> But just on the theoretical side, aren't there at least two
> reasonably substantial reasons why a large increase in the
> complexity and novelty of financial instruments increases the risk
> of a collapse of confidence? Namely

Maybe, but you don't need complex instruments to do this kind of work - all you need are some heavily indebted entities, or a daisy-chain of obligations in which one link goes bad. Worked like a charm in the 19th and early 20th centuries. A current example: the US mortgage market is characterized by increasingly exotic instruments, but the fundamental fact is that a lot of people have borrowed very aggressively, and in a serious downturn, risk losing their houses and causing serious economic problems. Maybe. Maybe not. But it'd be a mistake to focus on the exotic instruments when the real issue is debt and debt service ratios.

Doug ___________________________________ http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk



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