Monday, September 08, 2008

The System is Down

Volcker Says Finance System `Broken,' Losses May Rise (Update2)
By Steve Matthews and Doug Alexander

Sept. 5 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s.

``This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down,'' Volcker said today at a banking conference in Calgary. ``Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation.''

The former Fed chief projected ``a lot'' more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators.

``It is the most complicated financial crisis I have ever experienced, and I have experienced a few,'' said Volcker, who has endorsed Democratic presidential candidate Barack Obama. Volcker ran the Fed from 1979 to 1987, and engineered an increase in interest rates to 20 percent to quell inflation that exceeded 10 percent.

U.S. growth has averaged 2.3 percent so far this decade, down from 3.4 percent in the 1990s. The current growth rate is the weakest since at least the 1940s, when the government began compiling figures on quarterly gross domestic product.

Volcker's comments came after a government report today showed the U.S. unemployment rate rose to a five-year high as the economy lost more jobs than forecast in August. The report underscored concerns that U.S. consumer spending will weaken and push the American economy into a recession.

Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.
Fed Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has ``not yet subsided,'' and is contributing to weaker growth and higher unemployment. Policy makers will ``continue to review'' the Fed's measures to ensure liquidity to determine ``if they are having their intended effects,'' Bernanke said.

``Changes are going to have to be made'' to the global financial system, Volcker said. Banks three decades ago accounted for about 60 percent of U.S. credit; that later declined to about 30 percent as securitization -- where financial firms package assets into bonds and other instruments and sell them on to investors and other companies -- spread.

Volcker said he agreed with descriptions of the current financial system as ``dysfunctional. That is a polite way of saying it failed.'' The U.S. government, not the Fed, should take the lead in rescuing any financial institutions when ``push comes to shove,'' he said, echoing comments by former Fed Chairman Alan Greenspan.

The Fed rescued Bear Stearns Cos. from bankruptcy in March, facilitating the firm's merger with JPMorgan Chase & Co. by loaning against $29 billion of Bear securities. Bernanke has also made central bank loans available to nonbanks for the first time since the 1930s and lowered the rates at which banks can borrow from the Fed.

7 comments:

Dolphin Olympics fan said...

Does anyone know where i can find the 30 year average price graph for either the fraser valley or greater vancouver?

patriotz said...

REBGV Stats Package, August 2008 (Includes News Release)

Strataman said...

Well I must say I believe we are in the perfect storm, a category 4 financial hurricane that may well reach a five. Trouble is this hurricane covers the whole world and although its path may wander it will just keep going ....sorta like that battery bunny we all know! :-)

M- said...

The theory went that if you have risk spready out very thin all across the globe, then the risk ceased to exist.

As it turns out, what it means is that when one problem occurs, because everybody's so tightly connected, sharing all the same risk, everybody has to pull back, dragging everybody down, harder and harder and harder...

Wompeter said...

Hey mohican, just wanted to give you a hat tip, I copied your scatter plot and applied yours and jesse's analysis that you did back in May to some Victoria numbers.

My results weren't as strong but it was fun to do.
http://www.restats.ca

Panamericana said...

American Socialism:

http://www.cnbc.com/id/15840232?video=847958962&play=1

Dave said...

The theory went that if you have risk spready out very thin all across the globe, then the risk ceased to exist.

As it turns out, what it means is that when one problem occurs, because everybody's so tightly connected, sharing all the same risk, everybody has to pull back, dragging everybody down, harder and harder and harder...


M, that is not the theory. The theory of diversification is to reduce un-systemic risk, for which an investor does make a return (in theory). Systemic risk (i.e. what you are referring to) exists regardless and is broad based.