TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Putting it all into perspective
New Posts  All Forums:Forum Nav:

Putting it all into perspective

post #1 of 15
Thread Starter 
Gary and I have been compiling data for a piece, and since some of you are interested in the economics thing, I thought I'd share.

Since we're all up on the financial crisis, I'm just sharing raw data here - because it is rather jaw-dropping.

Note: we've talked about the credit default swaps (CDSs) that helped bring the market down. This is a derivative that was designed by JP Morgan in 1994 to trade the "risk" in loans made by banks. There are many types of derivatives - but basically they're financial instrument whose value depends upon the value of the underlying financial instrument. They were created as a way to distribute the risk of the underlying investment instrument. So the housing bubble of the 2000s contributed to the creation of the "derivatives" bubble.

- Derivatives have grown from about $100 trillion in 2002 to $516 trillion in 2007.

Yes, that's TRILLION. (This information comes from the Bank of International Settlements). Obviously, since the crash, this number has fallen dramatically. How much, we don't know. But to put where we were into perspective:

- The U.S. annual GDP is about $15 trillion
- U.S. Money Supply is also about $15 trillion
- Current proposed federal budget is about $3 trillion
- U.S. government's maximum legal debt limit has been $9 trillion.
- U.S. mutual fund companies manage about $12 trillion (before crash valuation)
- World GDP for ALL nations is about $50 trillion
- Unfunded social security and medicare benefit estimates range from $50 trillion to $65 trillion
- Total value of the world's real estate is estimated to be about $75 trillion (again, before crash)
- Total value of the world's stock and bond markets is a little more than $100 trillion (before crash)
- The credit default swap market portion of the derivatives market was estimated (before crash) to be approximately $62 trillion.

Note: this $516 trillion derivatives market is completely unregulated. According to the BIS it's a "shadow banking system." It's basically a new way of creating money outside of normal central bank liquidity rules - because they are private contracts between two companies. It's like a huge black market - because central banks require reserves, like stock brokers require margins - so there's something to back up the transaction. Derivatives don't. They're not "real money" and the transactions take place outside of "normal" business channels.
post #2 of 15
Eh .... a billion here, a billion there .... who misses it in the midst of all those trillions?
post #3 of 15
I think we need to be cautious and not hurry pell-mell into strict regulation of interbank lending. It's the free flow of funds around the world that contributes to keeping interest rates low, credit liquidity high, and foreign exchange priced real-time. What's needed is oversight more than anything else so that these exotic financial instruments no one understands and can't be valued against reality can't bring the system crashing down. Oversight creates transparency, transparency creates counterparty trust, and counterparty trust contributes to financial stability. Rushing in to legislate regulations, when the legislators creating the regulations have no idea of what they're regulating, is going to create a big problem on the other side. Rushing from one extreme to the other is no way to run a world economy. What's needed is stability, transparency, liquidity and trust, and all those attributes result from oversight.

Nobody can pull a fast one on anybody because everybody understands what's being lent and everybody understands what's being bought and sold.
post #4 of 15
Laurie - what are your thoughts on this idea: instead of SEC-type regulation of the interbank markets, where the financial instruments themselves are regulated as well as the market makers, let's regulate the buyers and sellers: the banks themselves, since they're already subject to regulation. Here's my thought: have a rule that says they cannot carry on their books as an asset any financial instrument that doesn't have an underlying asset. ie they won't be able to use these kinds of derivatives to meet reserve requirements, capital ratios, etc. They can trade them if they want to, but they'd be essentially just trading them for the profits and losses that accrue onto the income statement; the market value doesn't go on the balance sheet.
post #5 of 15
Thread Starter 
Tim, honestly, I haven't put any thought into what type of regulation should be required. While I think transparency is important - I don't know if an SEC-type regulation where the instruments themselves are regulated along with the institutions that trade them (requiring realtime transaction reporting, and the other things you point out) is actually possible - because the underlying instruments of the derivatives are so disparate. I haven't done any research at all on the matter, but in the instance of CDSs, they are trading potential large losses the swaps represent, not just the instruments - so how I don't know how they could keep it off the balance sheet. :dK:

Laurie
post #6 of 15
The chairman of the SEC, Christopher Cox, weighed in on this today in the NYT: Swapping Secrecy for Transparency The real shocker for me, which you've also just mentioned, Laurie, was this:
Quote:
As large as A.I.G.’s swaps exposure was, it represented only 0.8 percent of the $55 trillion in credit-default swaps outstanding — this total market is more than the gross domestic product of all nations on earth combined.
post #7 of 15
Thread Starter 
Thanks again for that Tricia! He's talking about creating a "stock market" like apparatus specifically for credit default swaps. I don't know how much of a concern the other $454 trillion in derivatives is - because I don't know what a lot of them are.

Laurie
post #8 of 15
Quote:
Originally Posted by LDG View Post
Thanks again for that Tricia! He's talking about creating a "stock market" like apparatus specifically for credit default swaps. I don't know how much of a concern the other $454 trillion in derivatives is - because I don't know what a lot of them are.

Laurie
That's what my b-i-l says, and he's been working for the Bundesbank (German central bank) for over two decades.
post #9 of 15
Thread Starter 
Quote:
Originally Posted by jcat View Post
That's what my b-i-l says, and he's been working for the Bundesbank (German central bank) for over two decades.
Which part? Your BIL says Cox is talking about a stock-market like apparatus for the CDSs? Or no one knows what the other $454 trillion in derivatives are? (...I mean if someone in the Bundesbank doesn't know.... )

Laurie
post #10 of 15
With respect to CDS'es they serve a useful purpose in that they hedge risk. But also, in that respect, they're really more of an insurance product than they are a securities product. The purpose of a security is to represent some kind of an asset, and the CDS doesn't. So I'm thinking it shouldn't be treated like an asset, either -- ie it can't be carried on the balance sheet, which is a listing of assets and liabilities. Actually, I think that if it's regulated, it should be regulated as insurance, which is an expense, and shows up on the income statement if a gain or a loss is realized.

And the practice of bundling these things is a problem that ought to be addressed as well because when that's done is it possible to accurately gauge the risk? I don't know. If you're buying and selling a product that represents transfer of risk, you need to know what the risk is before you can accurately price it.
post #11 of 15
Thread Starter 
You're asking good questions and making great points, and I don't know either. But I do agree - transferring risk of loss on loans really ought to be regulated as an insurance product.

Laurie
post #12 of 15
There definitely need to be some changes. I'm just concerned about a backlash getting out of hand and going too far, thus putting such a crimp on capital markets that we get another Great Depression scenario.
post #13 of 15
Thread Starter 
Quote:
Originally Posted by coaster View Post
There definitely need to be some changes. I'm just concerned about a backlash getting out of hand and going too far, thus putting such a crimp on capital markets that we get another Great Depression scenario.
Bet this will happen.

Laurie
post #14 of 15
Another Great Depression? You're really depressing me!! (And I don't feel like laughing)
post #15 of 15
Thread Starter 
Quote:
Originally Posted by coaster View Post
Another Great Depression? You're really depressing me!! (And I don't feel like laughing)
No, neither do I. And we really do see this as a potential, unfortunately. It's not our primary scenario, but Gary was talking about the potential last year - and the probabilities have risen dramatically since then.

Laurie
New Posts  All Forums:Forum Nav:
  Return Home
  Back to Forum: IMO: In My Opinion
TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Putting it all into perspective