<blockquote>'We don’t think that real economic and social problems can be solved by means of monetary policy.'
- Finance Minister Wolfgang Schäuble (
Source, September 17, 2011)</blockquote>
'..The derivatives marketplace would be a very different place today had it not been for repeated government interventions. The world would look differently today had AIG been allowed to fail back in 2008, with the collapse of their derivatives book reverberating throughout the global risk-intermediation daisy-chain..'<blockquote>'Another part of my thesis is that, increasingly, policymaker market interventions will do more harm than good. Is it mere coincidence that UBS’s (the old Union Bank of Switzerland) “rogue trader” left “need miracle” on his Facebook page last week as Swiss National Bank intervention led to an incredible 10% decline in the Swiss franc? One thing’s for sure, UBS will now rein in risk-taking in its “Delta One” operation and throughout the organization. And other firms will tighten risk parameters, as global de-risking and de-leveraging dynamics continue to gain the upper hand.
For a long time now, I’ve believed that inexpensive and readily available “flood insurance” was the key to ongoing Credit and risk market Bubbles. Cheap insurance distorts market perceptions and the overall marketplace, in the process promoting risk-taking. The derivatives marketplace would be a very different place today had it not been for repeated government interventions. The world would look differently today had AIG been allowed to fail back in 2008, with the collapse of their derivatives book reverberating throughout the global risk-intermediation daisy-chain. With a lot of friendly help from global policy makers, the markets bounced back and the hedging and financial speculation businesses came back as powerful and enterprising as ever.
Increasingly, I ponder to what extent the marketplace will continue to trust both the fairness and soundness of risk hedging markets..
..
It’s all become a very dangerous – and offensive – game: the myth of a functional marketplace for market insurance. The bottom line is that Credit and market risks are not “insurable”. They are anything but random and independent events – in contrast to auto accidents and house fires. Credit and market losses come in especially non-random and non-independent waves. And unlike property and casualty insurers that employ actuaries and build generally sufficient reserves for generally predictable future losses, those on the selling end of Credit and market insurance utilize self-reinforcing “dynamic hedging” strategies. That is, they must sell securities – often in a falling market environment – to hedge the “insurance” they have written. These strategies rely on the dubious presumption of “continuous and liquid” markets. And as these markets have become so enormous, there is also the reality that the marketplace cannot offload market risk.
One of these days, the selling required to hedge market protection written may overwhelm the market’s capacity to absorb derivative-related selling. We’ve appeared on the brink of this scenario more than a few times. Or, perhaps, the issue will be a loss of confidence in the integrity of the derivatives marketplace, with participants resorting to the liquidation of actual securities positions to mitigate risk in an extraordinarily risky environment.'
- Doug Noland,
Delta One, September 16, 2011</blockquote>
Context<blockquote>
(Money production) - '..there are No "Miracle" Cures from Inflation.''..At its heart it is a crisis of the fractionally reserved banking system..''..Mr. Greenspan fails to grasp the essence of this historic Credit Bubble..'The Age of the PhD Standard '.. a huge monetary experiment run amuck..''..completely underestimated human ingenuity and the power of the free market.''..fostering societies where people can live more humane lives..'</blockquote>