Tuesday, August 09, 2011

Global financial markets = very bright people acting stupid?

It's almost impossible for someone like me to avoid economics at the present time. in fact, I couldn't, so this week's Armidale Express column is in fact on the current position. It will come up on the New England Australia blog next week.

The key points that I'm making will not surprise regular readers here. They centre on the disconnect between current reporting and what I see as the real underlying economic realities.

Chatting around, and this is something I didn't mention in the column, one of the biggest problems Australia may experience is simply the freezing of global financial markets. This happened during the global financial crisis, making it hard for even very credit worthy borrowers such as the Australian banks to raise cash internationally.

There are some signs that this is happening now.

Most of the key players in current troubles whether in the markets themselves or in Government are very bright people, far brighter than me. Yet they do some very silly things: part of it is simply the herd instinct, part that they get caught in an alternative reality that progressively diverges from the real world.

The usual answer to this is more regulation and control to try to knock-off the excesses. But who can actually regulate the US Congress? I don't really care about the domestic arguments, but the damage done by that internal US political fight has really been global. 

Now if the game is against you, one option is to change the game, to opt out. Let me illustrate with a purely hypothetical example.

Postulate a hypothetical country with a strong economy and a triple A credit rating. It hits a global credit crunch that requires it to guarantee local bank borrowings. It charges a fee for this and makes a profit, yet it leaves the game unchanged, while local borrowers still suffer credit constraints.

Now that country is in a similar position with a very large range of investment needs to be met. This time that Government issues a very large international loan denominated in its currency with a range of maturities. Postulate another country with lots of surplus funds that it needs to invest, but with few options. It is likely to see the new issues as an attractive options, allowing a very good interest rate.

The borrowing Government or its entity then makes the funds available to local banks and the credit market more broadly, making a making on the loan. Local banks and borrowers are able to proceed. The country makes a profit. Its capital market moves from the periphery towards the centre of the global financial scene, creating more profits.

Sounds dumb, I'm sure. It breaks many current nostrums. Yet, properly managed, it would yield a national profit.

Sometimes in the face of very bright people acting stupidly, simple dumb answers can make sense.           


Anonymous said...

Very bright people made a lot of money today. It's the rest of us who I sometimes wonder about.

And your concept is very sound, which is why probably nothing will come of it. Sorry Jim; disgruntled today.


Jim Belshaw said...

I did say buy bank stocks!

Nothing will come of my concept, kvd, because people are locked into what they see as is, not what might be.

Anonymous said...

While we're in the land of postulations, I see your theory as:

'Surplus funds country' [SFC] lends to Australia at a reasonable rate.

Australia on-lends to our banks (at markup) to provide funding.

Banks lend to 'everyone' (at reasonable markup) and thus the wheels turn: 'everyone' pays back to the bank; bank pays Australia; Australia pays SFC.

This assumes an orderly return both of funds and the interest thereon - and I have no quibble with that, or the objective.

My question is why couldn't SFC be replaced with "Australia's Future"? Call it AF.

Printing money is said to be inflationary, and/or debasement of one's currency. But what's the actual difference in the above scenario if the SFC is in fact our future selves - aka AF?

Remember the base presumption is that orderly loans can be usefully employed, and are repaid in an orderly fashion.

Just asking ...


Rummuser said...

There are wheels within wheels Jim. Please take a look at this bit of wisdom - http://www.familysecuritymatters.org/publications/id.10116/pub_detail.asp

Jim Belshaw said...

You capture it, kvd. You could do it using your second method if I understand your point. However, there are a few issues.

One is that the second approach does nothing to meet international liquidity needs. On-lending creates imports. Since no foreign exchange is involved those imports have to be funded in other ways. It also doesn't build up the depth of the Australian capital market. Central to my idea is that SFC doesn't lend direct to the country, but subscribes for securities that can be traded.

Jim Belshaw said...

Interesting Ramana, presenting one side of a debate that is a very hot one in this country too. I have been meaning to do an update on it, probably on the New England blog.

Anonymous said...

With you right up to that last word "traded".

Cannot see the necessity for this, given the potential then arising for manipulation and short-term-ism.


Jim Belshaw said...

There are different issues here.

One of the arguments i put in earlier posts related to a mismatch between traded currencies and changing patterns of trade. To my mind, they had to come into better sync. One interesting thing was the process likely to be involved.

Part of my argument in this post is that if the game suck, change the rules. The two sets of arguments link in my mind because the type of approach I was talking about would aid liquidity if that were to be a problem, while reducing in a small way the power of US Treasuries by providing an alternative.

Now that does leave open manipulation etc. The difficulty is that the markets do perform a valuable function. So how do we improve performance by means other than regulation. Regulation addresses behaviour,not the structural issues that help facilitate that behaviour.

Anonymous said...

Interesting commentary here:


- including the thought that maybe a 'government rights issue' is next. Must be reading your blog!


Jim Belshaw said...

Mmm. If only, KVD! Actually, I profoundly disagree with this article, or at least core parts of it. I need to think about that, however, before responding.

Anonymous said...

Hey Jim, don't be too harsh on him. He carried the ball quite effectively during the initial days of the ANZ Opes Prime debacle.

In all this I can't help thinking it's a bit like poker for matchsticks that I used to play with my kids; when somebody had won the lot we'd all agree to divvy up the matches, and start again. I wonder if the Chinese would take my call...


Jim Belshaw said...

Anybody who did that KVD deserves support! Do give the Chinese a call!