Archivo de septiembre/2007

Beginning of this year there were two main disequilibrium challenging the international financial stability: one was the US current account deficit and the second one was the growth of credit derivatives. From April this year, we started seeing the dangers of the former that exploded during August in the form of the mortgage sub prime crisis. The sub prime crisis is just a focal point in a wider problem, the growth of unregulated credit derivatives. Credit derivatives had been praised buy many (among them Alan Grenspan) and it truly has its virtues if credit risk is really diversified. But what we have seen recently is that this diversification has not worked out effectively and most of the credit risk is turning back into the books of their initial originators, the banks. Central Banks are trying to weather the storm, either through smoothing the reassessment of risk taking place (through liquidity injections) or by altering their long-term policy views and lowering the reference rates (as it has happened in the US). Once the turmoil is over, government and Central Banks should turn their eyes to the true root of the problem: the lack of regulation and information on credit derivative origination.

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Over the weekend I read this speech by Paul Tucker of the Bank of England. It is pretty interesting and premonitory. The speech was delivered in April and addresses the two main imbalances he foresaw in the global economy at the time he delivered the speech: US current account and the increase of credit risk transfer (what he calls vehicular finance).

He considers the possibility of shocks on these two fronts and reviews the policy implications. A good reading that foresaw the policy actions taken by the Fed and the ECB in mid August.

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Bernanke expected speech in Kansas City Fed’s annual symposium in Jackson Hole, Wyoming calmed markets. Bernanke in his speech on the 31st of August was very specific on the role of the US Federal Reserve (Fed) in dealing with the sub prime rout: