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(snip)"They [the Chinese Gov't and Chinese Central Bank - sic]are basically saying, the crisis is due to overuse of systems set up to prevent a banking crisis. Now, all things are 'off the books and off shore.' This caused too much debt creation and the M3 rate of all of the EU/US and Japan has taken off like an inflationary rocket.
As long as the banking system doesn't get dragged into the mess, the subprime mortgage problems would only have limited impact. As far as direct investment risk is concerned, investors will have to absorb their losses, and central banks generally would not stand to provide support. As for debt risk within the banks that bear systemic implications, actions have to be taken to curb its spread. As illustrated in Northern Rock case when the drying up of market liquidity begins and threatens to spread, the bank of England must act.
Reviewing the debt instruments, we learn that the creditor-debtor relationships imply greater systematic risks. Similar cases can be found by reviewing lessons from the Asian financial crisis and the Japanese experience. To reduce risk and increase financial stability, great effort should be made to develop direct financing. However, it's vital that direct investment products are not twisted to simply shift the risk back to the banking system. In such a process, the key is to foster and develop investors, including institutional investors as well as individual investors, who can recognize specific risk and have the ability to undertake risks.
I would suggest, moving our riskier parts of our banking/investing systems to pirate coves all over the planet was a bad, bad, BAD idea. And this should be ended as quickly as humanly possible. The off-the-books mess is due to the books being off-the-shores. The Chinese used Hong Kong, when it was part of the Queen's possessions, as an off-shore entity. But the Chinese control Hong Kong now and it is still flourishing while not being a pirate cove! Understanding risk is important but one can't do this if one is hanging out with outlaws. By definition. Outlaws and pirates take wild risks in order to loot places. Which is why they are bad financial advisors for any sane system.
Rather, great efforts should be made to develop an array of financial products, including the hybrid products such as debt-equity mixed and some derivatives. We need to recognize that problems arise not because the securitization or derivatives as a product are somehow flawed. Instead, most of these troubles result from problems in information disclosure or the pricing mechanisms, or because the design of the mechanisms implied moral hazard.
This moral hazard business is something the Dragon has been gnawing at for a while. When it tried to protect factories and systems in the past, this caused the bleeding of lots of red ink. The Iron Rice Bowl proved to be as much a failure as the EZ credit in the West. And all western nations tried the protectionist system and failed. But then, when they took up 'free trade', this was also a failure. Figuring out why is life and death and the one country that should be doing this is the US. But it isn't happening. So maybe China will explain all this to us at some future date."(snip)



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