Monday, January 28, 2013

Davos And The Unintended Consequences of The Greatest Economic Experiment

The Rumor Mill News Reading Room 

Davos And The Unintended Consequences of The Greatest Economic Experiment
Posted By: Watchman
Date: Monday, 28-Jan-2013 09:06:53

As you must realize the central banks of “advanced market economies,” the U.S., Great Britain, Western Europe and Japan, for starters, have for the past 5 years consistently lowered interest rates to zero and swollen their balance sheets quite enormously– a coordinated and unprecedented policy on which the stability of the global economy rests.
The intended consequence of this deliberation was to stimulate asset prices, household wealth and consumer activity such as to restore a semblance of economic growth.
And indeed this desirable short term effect has performed well as stock prices and residential home prices rebounded. Lurking in the background, suggests economist William White is the “undesirable
longer run effects” like “negative feedback mechanisms” that will weaken growth, threaten the health of financial institutions and “encourage imprudent behavior on the part of governments.”
One of the unintended consequences is the “shadow banking system,” which has the inherent quality of being non transparent, of being opaque. of in effect being hidden from view from regulators, from the media, and from most of the financial system. As a recent report by the Financial Stability Board had it “shadow banking” is in effect a long chain “of interactions involving collateral, rehypothecation, large offsetting position in CDS(credit default swaps) and other derivatives, exposure to counterparty risk became almost impossible to estimate.”
Get that? “exposure to counterparty risk became almost impossible to estimate.” No wonder the Financial Stability Board believes “the opacity of the system proved a substantial impediment to supervisory oversight.” So, the danger is no supervision available when excessive risk is being taken– and excessive risk may be taken as what’s actually happening behind the scenes is not transparent. Non transparent means we are
living in the dark.
Another unintended consequence of easing and zero interest rates is the huge pension deficits in the U.K. where the Pension Protection Fund is only 70% funded– and part of the overall underfundedness of over $1 trillion. Actuarilly speaking pension funds are short the income stream required maintain stability of retirement income. Zero cost of money has a price that makes the promise of a fixed income in retirement an in the dark.

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