Le Temps
Monday 19 November 2007
A debacle of planetary proportions, born, however, from a revolutionary idea: to create financial instruments that redistribute risk on a large scale. Redistributed among numerous investors, the credit risk managed in this way allowed a greater number of people to have access to financing.
Consequently, credit derivatives have a highly desirable economic function. But today they are threatened by the speculative excesses of the banking sector lured these last six years by the massive demand for cheap American mortgages.
The finance industry will not get by without a profound reconsideration of its own mechanisms. Beginning with its central nervous system: the mathematical models it uses to forecast the prices and risks associated with these complex financial products. These models have proven themselves obsolete. Overtaken by frenetic growth in those derivatives, they haven't been able to capture the nature of these new risks and will be supplanted.
But the models say what people want them to say. In fact, the banks could have adopted more cautious hypotheses, but they opted for the rosiest scenarios, extrapolating from the untainted stock market record of the last five years. Taking more risk into account seemed less profitable then.
Miscalculation. For the market has come to claim its due - the price of undercompensated risks - deducting an estimated $90 billion from banks this semester. People are even talking about major recapitalizations. Profits from derivatives and retained earnings have evaporated. If the securitized debt industry survives, the models will have to reflect the worst as well as the best. The obvious gushes forth at every crisis: risk is not free; it has a cost, and someone has to pay it.
A New Equilibrium
By Pierre Veya
Le Temps
Tuesday 20 November 2007
Variations in currency exchange rates reflect the health of national economies and the expectations of economic actors. They are the spice of financial markets and the price of uncertainty. Exchange rate variations raise real worries when they are too brutal, too rapid and arise from an unanticipated or poorly mastered shock. With a little imagination and a pinch of exaggeration, one could conclude that the present drop in the dollar marks a turning point in the greenback's supremacy, the beginning of a long historic decline for which we should urgently prepare. That forgets that the drop in the dollar obeys two principles. The first is cyclical and not at all worrying. Following history's consecrated and verified formula, the greenback's slide expresses the American economy's fragility (the risk of recession) and the concrete reality of a deeply indebted and too-extravagant country that must reestablish its major [fiscal and trade] equilibria.
The second principle at work is structural, slower, but also significant. We are probably witnessing a re-equilibration of the monetary system in favor of the euro, and tomorrow it will undoubtedly be the Chinese currency's turn. This movement testifies to the fact that the United States is no longer the sole source of economic dynamism. Asia and Europe's stability assures the financial system real possibilities of diversification and risk-taking. But we're not in the scenario of rapid and clear-cut substitution that Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez naively dream of. Even following the colossal shock constituted by the First World War, it took the dollar more than ten years to dethrone the pound sterling and take over as the currency of refuge.
The dollar, like the American economy, still has fair days ahead. But the day is approaching when the president of the United States will no longer to able to answer the rest of the world as Richard Nixon did: "The dollar is our currency, your problem."
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