Saturday, October 11, 2008

Gamblers at risk. This is the financial crisis mantra.

Gamblers at risk. This is the financial crisis mantra.

The key word in the plan of action and Financial Stability Forum recommendations is ‘risk’. This is the favourite word of gamblers.

This word is the problem and the solutions being worked out by nerds, quants is to use computer simulation models to manage ‘risk’.
The unanswered question is: why get into a ‘risk’ situation in the first place with use of derivatives and other inventions collectively called complex financial instruments?
Another unanswered question concerns nations other than G-7. There is no sense of remorse or guilt on the part of the G-7 for the mess of their creation which has impoverished many part of the globe outside of G-7 nations. Surely, the next meeting of G-20 will be a platform for unsolicited advice on how the central banks of G-20 nations should come to the rescue of the G-7 nations which have landed themselves in the financial turmoil.
It is a pity that an opportunity created by the financial crisis is being wasted by not addressing the central issue: fetishism of money. Remedies are sought by the proven failures such as ‘encouring more spending’, ‘putting money in the hands of consumers to spend’ and so on. This is the only demand-driven solution the nerds, quants can think of to ‘stimulate’ the financial markets. Such moves will only exacerbate the rapid slide down of a recession into a depression.
A meeting of financial talking-hats which cares little for the poor people of the globe who are being drawn into the tsunami created by the financial markets is a meeting in futility. The good news for countries like India is that these markets constitute an insignificant percentage of the productive capacity of the nation represented by GDP. It is time for G-7 to realize that wealth of nations is not enhanced by complex financial instrument but by ensuring employment and judicious, sustainable use of the limited resources of the globe.
G-7 meet and the action plan is a clear indication of the poverty of economic thought. It is time to reinforce the goal of dharma as abhyudayam, ‘welfare’. It is time to talk about abhyudayam on the globe and not about the loot engaged in by gamblers calling themselves financial wizards.

October 10, 2008
G-7 Finance Ministers and Central Bank Governors Plan of Action
Washington-- The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:
1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.
5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF's critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.

Enhancing Market and Institutional Resilience
On 10 October 2008, the Financial Stability Forum (FSF) presented to the G7 Finance Ministers and central bank Governors a follow-up report to its April Report on Enhancing Market and Institutional Resilience. The follow-up report reviews the implementation of the recommendations set forth by the April report in five areas:
• Strengthened prudential oversight of capital, liquidity and risk management
• Enhancing transparency and valuation
• Changes in the role and uses of credit ratings
• Strengthening the authorities' responsiveness to risks
• Robust arrangements for dealing with stress in the financial system
Public sector and private sector initiatives are underway in these areas. The FSF will continue to facilitate coordination of these initiatives and oversee their timely implementation, thus preserving the advantages of integrated global financial markets and a level playing field across countries.
The follow-up report is available here.
The FSF Report on Enhancing Market and Institutional Resilience in April 2008 is available here.

No comments: