Well, it's been a few months since my brilliant essay on the Eight Critical Bubbles that led to the current financial kerfluffle. This is an update,
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1 off-book asset liabilities
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1.1 GAAP allows
toxic assets (under performers) are simply taken off the books and dumped into offshore accts. Can't be audited at that point, but they are still REAL!
1.2 Action taken - some companies transitioning IFRS, bit slow change is the order of the day - Grade D.
1.3 Additional action required - Get with it!
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2 credit card debt
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2.1 Description - Many Americans resolving this debt issue, but n critical mass yet. The unintended blessing of a long jobless recovery may be the
extension of the time frame to resolve credit card debt!
2.2 Action taken
2.3 Additional action required
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3 Emerging Markets
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3.1 china/india/latin america
financial expansion/contraction of these nations is accelerated.
3.2 Action taken none. these countries are taking effective stimulus action, but their base is STILL manufacturing for the West.
3.3 Additional action required - Uncertain. Will they transform to Western style upper tier process economy, or still act as subcontractors. To soon to tell.
*** A word about China: Taking into consideration data provided by both Chinese and respected international sources of macroeconomic indicators the Chinese economy, as well as the likely impact recent events within China, no imminent collapse of the Chinese economy appears likely over the next five years. Rather, the economy is likely to continue to perform favorably when GDP growth, urban unemployment, external and domestic fiscal balances, stability of the banking system, FDI, and exchange rate stability are given relative importance. As the world financial crisis unfolds China may wind up owning substantial shares of some major financial institutions.
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4 Sub-Prime Mort
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4.1 see visual guide - Beginning to lessen in pain, but the root cause - Toxic assets still held by banks- has NOT been resolved.
4.2 Action taken - need to exercise some forensic accounting and identify these assets, extract them, and put them in a government - sponsored "band bank" to resolve them.
4.3 Additional action required
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5 private derivative contracts
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5.1 Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
5.2 Action taken- Various competing bills in Congress to regulate the derivative market, but no action so far.
5.3 Additional action required
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6 Default credit swaps
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6.1 A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default or on the occurrence of a specified credit event (for example bankruptcy or restructuring). Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
6.2 Action taken
6.3 Additional action required
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7 bond market inflation/deflation
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7.1 Radical swings in bond yields, usually in a negative parallel track with the stock market - That's how the bond market could be gutted, and trillions in wealth destroyed. Theoretically, financial disruption may (???) occur which causes some of the trillions in derivatives to go sour, causing massive selling of the underlying assets to raise cash to reduce margin and other debt. Such a sudden "crisis" could erase trillions from global liquidity. How? Because the money was lost. The derivatives turned out to be worthless, and the stocks and bonds were sold into a plummeting, panicky market. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
7.2 Action taken - Static so far. Waiting for the shoe to drop.
7.3 Additional action required
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8 Banking reserve exposure
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8.1 banks over leveraged - The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates. 10:1 is a good ratio of borrowed assets (leverage) to "cash on hand". The US bank average is now 30 to 50:1. European banks go to 135:1. THIS IS VERY BAD!!
8.2 Action taken. No change. The over leveraged banks are still very vulnerable to fluctuations in LIBOR
8.3 Additional action required
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