The Economic Crisis in Europe

[Ciaran]

Originally Posted by Miss Tick

LOL. I wish I had an plan.

I read somewhere how it used to be the sciences that tried to recruit all the great minds of a generation but now it's the financial sector.

Wizards with a conscience...if only...

Ah if only these wizards would use their powers for good instead of evil.

But the thing is the minute you begin to do good your powers start to fade until eventually they disappear completely.

It really a strange new world.

There's nothing new about financial engineering. It's been with us for many centuries via secondary markets which led to (in)famous scenarios such as the Dutch tulip crisis in the 17th century and the South Sea Bubble the following century.

The terminology, such as credit default swaps and derivatives, has got more complex and technical but the same concepts have been around throughout modern history. The may appear mystical but, intrinsically, instruments such as credit default swaps are ways to better manage risk - in other words, to ensure that the investor doesn't lose money.

The issue isn't, therefore, the instrument or the technology behind it. Rather, the issue is a much more basic one of borrowing of resources to speculate i.e. speculators will borrow significantly on positions with the result that, if their positioning is wrong, not only do they lose out but others do too. Sometimes this has significant negative consequences as we've seen recently.

On the issues you mentioned above of credit default swaps and how hedge funds are holding Greece to ransom. It's not hedge funds holding Greece to ransom. Rather, it's parts of the European Union apparatus that do not want an actual default of Greek sovereign debt for fear that this will have a domino effect sending the "house of cards" that is the Eurozone crashing down through similar defaults in other Eurozone countries, most likely Portugal & the Republic of Ireland and, more worryingly due to scale, Spain and Italy.

I have significant sympathy for the hedge fund position on this as investors are effectively being asked to agree to a default that is optically not to be called a default, with the effect that the credit default protection does not kick-in. Are there investors using this process for their short-term speculative purposes? Of course, but that doesn't take away from the fact that we're in an "emperor's clothes" scenario where the European political establishment is trying to orchestrate the inevitable Greek default through a "smoke & mirrors" approach whereby no official default is registered.

If I were an investor, who had CDS protection, I certainly wouldn't agree to that but, then again, I'm not an advocate of this European project and have a loathing of the European Union.

Furthermore, there already is significant financial regulation in place and prospective regulation that is being introduced over this coming decade. The key, from my perspective, isn't necessarily more regulation. Rather, it's about better regulation which can sometimes be less regulation as less is often more. This regulation needs to embrace a very simple and straightforward concept - that is the concept of moral hazard which, in simple terms, is you either pay back your debts or you suffer real consequences as a result.

This needs to be enshrined as regards all speculation, whether it's the large faceless fund using technical instruments in an attempt to make many $ millions or the man or woman who buys a condo with a 90%+ mortgage in the hope of capital appreciation.