Thursday, October 09, 2008

Global financial avarice unrelated to job-creating wealth of nations

Global financial avarice unrelated to job-creating wealth of nations

An excellent, perceptive article by Blaine Harden. This is one of the most lucid articles I have read so far on this global money fetishism mess. Congratulations. Harden nails the core problem which led to the financial crisis. Citing Kang Man-soo, South Korean Finance Minister, he approvingly quotes: "Derivatives and hedge funds are like casino gambling,"

By what stretch of imagination can a derivative become money to be traded? Such an imaginatin can come only from a gambler's crooked mind, driven by personal greed.

It is the derivatives, stupid. This vikalpa, a fetishism of money taking a new avatara as derivatives is no stroke of genius. It is a monster created by nerds, quants and avaricious financial market traders, avaricious financial institution officials taking home absurd levels as salaries and perquisites. These are the looters of the nations’ wealth.

The G-20 meeting will fix nothing if it does NOT ban these derivatives and hedge funds. We are seeing the spectacle of Indian FM encouraging derivative based Participatory Notes (whose owners are unknown, could even be terrorist-financiers and 10 Janpath chamcha-s) and even encouraging these PN issuers to enter the debt market. This is a criminal act, tantamount to treason. SEBI Chairman, RBI officials and FM officials who participated in this fraud should be apprehended as partners in a crime.

I have only one problem with the title of the article. It ain’t global collateral damage. It is global loot orchestrated by incompetent financial regulators and dumb politico-s riding on the Keynesian ghost. It is time to bury this ghost once-and-for-all and introduce sanity in the global finances: money should be a true reflection of the wealth of nations, not the state of gamblers’ evil minds.


Global Collateral Damage
S. Korea Reels Under Crisis Created in U.S.
By Blaine Harden
Washington Post Foreign Service
Friday, October 10, 2008; D01
SEOUL, Oct. 10 -- With its toxic securities and its insistence on open markets, the United States has a lot of nerve and a lot to answer for.
That's what South Korean Finance Minister Kang Man-soo said as he prepared to leave for a weekend meeting in Washington of finance officials searching for ways to calm the global financial crisis.
"The United States almost forced the rest of the world to open up their financial sectors," Kang said in an interview. "It has been telling the world that its derivatives are an advanced technique created by some genius." Derivatives are a type of financial instrument.
Along with scores of other countries, South Korea has become the roadkill of such genius, which created derivatives as well as mortgage-backed securities.
As problems with U.S. subprime mortgages metastasized this year into a worldwide stock market meltdown, currency and stocks in this high-tech, export-driven country have lost about a third of their value. In early trading Friday, the country's benchmark Kospi stock index fell as much as 8 percent, and is down more than 36 percent this year.
Prospects for growth in Asia's fourth-largest economy have suddenly dimmed. Consumer spending has turned sluggish. Panicky foreign investors have pulled half their holdings out of Seoul's stock market. Credit for small and medium-sized businesses is drying up.
Dollar hoarding and currency speculation are so rampant that the country's president, Lee Myung-bak, pleaded this week with citizens to act patriotically and "refrain from greedily pursuing private interests." Other officials have implored local lenders to sell off foreign assets and bring dollars home for the good of their country.
In the interview, Kang made it clear that he and many Koreans are upset by the financial example set by the United States, which is South Korea's most important ally and its capitalist role model. "Derivatives and hedge funds are like casino gambling," he said. "A lot of Koreans are asking, how can the United States be so weak?"
When he arrives in Washington for the meeting organized by the International Monetary Fund, Kang said, he will urge foreign ministers from the Group of Seven industrial nations to "bring emerging markets into consideration as they make plans for a solution."
"When there is a problem, only the G-7 gets together to resolve it," Kang said. "I find this kind of behavior to be inconsiderate."
In conjunction with the G-7 talks, U.S. officials say there will be a "special meeting'' of finance officials from the Group of 20, which combines developed and emerging economies and includes South Korea. "We're reflecting a reality of the global economy," Treasury Undersecretary David McCormick told reporters this week.
The reality that infuriates South Korea's finance ministry and its central bank is that the country's economic fundamentals are relatively strong, especially in comparison with those of the United States.
A decade ago, South Korea had to be bailed out of the Asian financial crisis by an emergency loan from the IMF. The government had allowed short-term foreign debt to overwhelm its foreign currency reserves. That is not the case now.
The Bank of Korea has $240 billion in reserves and could easily pay off its entire short-term foreign debt, even in the unlikely event that it all came due at once, said Ahn Byung-chan, director general of the Bank of Korea's international department.
Unlike in neighboring Japan, Korea's exports are still booming, up 28 percent this year, with 50 percent growth to Russia, South America and the Middle East, according to the finance ministry.
"Our exports are strong and will be strong for 2 1/2 more years," said Ahn, pointing to $160 billion in shipbuilding contracts that have been signed in recent years.
And South Korea, unlike Japan, is well-positioned to grow in spite of an expected drop in U.S. consumer spending. Only about 10 percent of Korean exports are sold to the United States, with the bulk going to China, the Middle East and other emerging markets.
"The dollar problem in Korea came from outside," said Kang, referring to U.S. banks that stopped making dollars available to South Korea as the credit crunch worsened stateside. "We are ready and willing to manage this problem."
He said falling oil prices in the past month, combined with strong export earnings, would return South Korea to a surplus in its current account in the final quarter of this year and should strengthen the country's currency. The current account is a broad measure of a country's trade balance.
Credit agencies and analysts outside the government agree that South Korea has managed its reserves in a way that makes a repeat of the 1997 financial crisis extremely unlikely. But they also say that the sharp decline of the South Korean won, which has fallen to a near 10-year low against the dollar, has been caused by real weaknesses in the country's economy.
Household debt in South Korea was 153 percent of household disposable income in the second quarter of this year, according to UBS Securities. That level of debt, while common in the United States and Britain, is rare in Asia. Making the problem more dangerous is that a fast-growing slice of household debt in South Korea is in high-interest loans to low-income people from nonbank institutions.
"This is the third time in the past decade that South Korea has created a credit bubble," said Duncan Wooldridge, chief economist in Asia for UBS, adding that the bubble could burst in the likely event of a global recession that cuts exports, jobs and incomes.
Still, South Korea has in recent years enacted home-lending laws that are far more cautious than those in the United States.
A 2005 law limits the size of mortgages to 40 to 50 percent of the value of a house or apartment. That makes it highly unlikely that a large number of mortgages could go "under water," meaning the loan is more than the value of the house, as has happened in the United States. Another law limits the size of home loans based on income.
"Even though we do have debt problems, I don't think it can blow up like the subprime situation in the United States," said Lee Doo-won, a professor of economics at Yonsei University in Seoul.
Special correspondent Stella Kim contributed to this report.

1 comment:

Amaryllis said...

Whether you like it or not, these financial derivatives are here to stay when this current financial crisis is abated. It will be regulated though, to keep the ratings of these derivatives clean.