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alex yesikov

Tag, You're It! Too Big to Fail Risk Transferred, Not Eliminated - Daniel Indiviglio - ... - 2 views

www.theatlantic.com/...239414

Systemic Risk USA Banks Financial Crisis 2008 Too big to fail

shared by alex yesikov on 30 May 11 - No Cached
  • Whenever we think of giant firms that a government feels it must bailout, big banks generally come to mind. Sure, an insurance company sneaked in there too, but AIG might have been more of an exception, since it so grossly underestimated the risks it was taking on its financial products and lived in a grey regulatory area. Although last summer's giant financial regulation bill sought to eliminate the systemic risk that led to a crisis a few years ago, it may have merely transferred some of it, creating a new breed of too big to fail firms
  • Those who understand the crisis know that derivatives were involved, particularly through AIG. It needed to be bailed out, because it did not have enough capital on hand to back up the credit default swaps agreements it had written. A large number of those were tied to the housing market, which caused the crisis.
  • In order to avoid this problem derivatives pose in the future, new financial regulation demands that all derivatives are cleared, when possible. For those who aren't familiar with clearing, the general idea is that each derivative is matched with an equal, opposite derivative through a central bookkeeper -- a clearing house -- to net out the risk they pose (more explanation with a lengthy analogy here).
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  • For example, imagine if AIG had cleared all of its credit default swaps. In theory, that means a clearing house would have ensured that the insurer had ample cash (or other collateral) on hand to satisfy their payouts.
alex yesikov

Governments Are The Primary Creators Of Systemic Risk - Charles Kadlec - Community of L... - 2 views

blogs.forbes.com/...mary-creators-of-systemic-risk

Greece Systemic Risk Blog Resession Euro

shared by alex yesikov on 30 May 11 - No Cached
  • The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty.
  • The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis.  The government’s debt now totals more than 150% of its GDP, and continues to grow.  Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could roll over its maturing debts, as well as finance additional deficits at interest rates under 6%. However, the government’s austerity plan of tax increases and budget cuts has not reduced current or projected government deficits because the economy in 2010 contracted by 4.5% and the unemployment rate jumped to 15%.
  • Normally, this would be a matter between a debtor and its creditors. However, European Central Bank (ECB) Executive Board Member Juergen Stark warns that the effects of restructuring “could overshadow the effects of the Lehman bankruptcy,” which is associated with the beginning of the 2008 financial crisis.
  • ...3 more annotations...
  • In the case of Greece, government actions and regulations also lie at the heart of what threatens to be a European financial crisis.
  • This risk is amplified by special rules created by politicians that encourage banks to lend freely to governments.
  • Here’s how it works. Governments require banks to hold capital against the loans that they make, anticipating that in the normal course of business, some of the loans will not be repaid.  The riskier the loan, the more capital that needs to be held in reserve. However, under international rules negotiated by government representatives through the Bank for International Settlements (BIS), government loans fit into a special category that has a 0% risk requirement.  That means European banks do not have to hold any reserves against loans they make to European governments.  That’s right, politicians implicitly promised banks that governments would never default.  And, given the opportunity to make “risk free” loans that require no capital commitment, bankers purchased mountains of government debt.
alex yesikov

Could Greece be the next Lehman Brothers? Yes - and potentially even worse | Larry Elli... - 0 views

www.guardian.co.uk/...ce-debt-crisis-lehman-brothers

Systemic Risk Banks USA Financial Crisis 2008 Greece

shared by alex yesikov on 02 Jun 11 - No Cached
  • It was less than three years ago that the failure of Lehman Brothers sent tremors through the global financial system, threatening the existence of every major bank and triggering the most severe economic crisis since the Great Depression. As Europe's policy elite met for fresh crisis talks today, the dark fear that haunted everyone around the table was this: if the bankruptcy of a middling-sized Wall Street investment bank with no retail customers could have such dire consequences, what would happen if the Greeks decide they have had enough and renege on their debts?
  • Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.
  • To be fair, it's a tough one. A single currency that involved a hard core of European countries that were broadly similar in terms of economic development and industrial structure might just have worked. Bolting together a group of 17 disparate economies with different levels of productivity growth, different languages and different business cultures was an accident waiting to happen, and so it has proved.
Dmitri Tkachenko

Surprise: Low interest rates seen sticking around - The Globe and Mail - 0 views

www.theglobeandmail.com/...article2032075

Low Interest Rates Bonds Financial Industry Inflation Stock Market

shared by Dmitri Tkachenko on 25 May 11 - No Cached
  • Dmitri Tkachenko on 25 May 11
     
    "Interest rates have recently being going somewhere unexpected: down. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.If so, it will mean pain for savers, but good news for borrowers .A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they're in no immediate need of funds. Mortgage rates have fallen, too - good news for homeowners looking to refinance. But lower rates have not turned out so well for some of the market's savviest players, including Bill Gross, the founder of Pimco, the world's biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds. Oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative. Investors are getting nervous and growing more willing to buy super-safe government bonds."
Steven Iarusci

Canadians load up on mortgages, cut card debt - 0 views

www.montrealgazette.com/...story.html

credit card debt mortgage rates bubble housing

shared by Steven Iarusci on 02 Jun 11 - No Cached
  • The bank set aside $145million in provisions for credit losses, down $104-million as more customers repaid their loans.
    • Steven Iarusci
      Steven Iarusci on 02 Jun 11
       
      BMO is the bank in question.
  • consumer credit-card balances are declining as bank customers start to heed warnings about taking on too much debt
  • On the residential mortgage side, Mr. Downe said he expects to see growth start to "soften" in the coming months
  • ...8 more annotations...
  • record household debt levels have left this country vulnerable to economic shocks
  • the Canadian banks will report a slight increase in profit for the quarter as they contend with the impact of declining consumer borrowing, moderating capital markets activity and other headwinds.
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  • With domestic household debt levels hovering close to where they were in the United States prior to the financial crisis, many observers are warning that Canadians need to start paying down debt if the economy is remain on level footing
  • anadian consumers continue to pile on mortgage debt despite repeated warnings that they need to crank back on borrowing if this country is to avoid a painful real estate correction
  • Canadian consumers continue to pile on mortgage debt despite repeated warnings that they need to crank back on borrowing if this country is to avoid a painful real estate correction
  • growth in the overall home loan market "is continuing to be more robust,"
  • Canada's fourth-largest lender on Wednesday kicked off second-quarter bank earnings season with a 7.5% increase in profit on the back of lower provisions for bad loans
Carolyne Wang

How paying people's way out of poverty can help us all - The Globe and Mail - 0 views

www.theglobeandmail.com/...singlepage

Income Inequality Tax Cuts Homelessness Set Annual Income Unemployment

shared by Carolyne Wang on 02 Jun 11 - No Cached
  • there’s an increasing awareness, among even the country’s most wealthy, that poverty reaches beyond the tables of the hungry and digs into their own pocketbooks
  • When people are poor, out of work or homeless, it hurts the bottom line of all Canadians. And as the country struggles to maintain a shaky recovery amid growing global economic uncertainty, that’s not a hit they can afford to take.
  • If Ottawa and the provinces fail to make this a priority, Tory Senator Hugh Segal predicts, “over time, we will begin to run out of the money that we need to deal with the demographic bulge because it will be consumed in the health care requirements of the poor, which will increase. It will be consumed in the costs of the illiteracy and unemployment which relate to poverty. ... And it'll be unsustainable.”
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  • It’s already on the radar of some provinces: One of Christy Clark’s first actions as B.C. Premier was to raise the province’s minimum wage for the first time in a decade and offer a tax cut for low-income families. Ontario has launched a sweeping review of social assistance programs that Community and Social Services Minister Madeleine Meilleur has admitted are failing the province’s neediest.
  • Despite Canada’s reputation for a strong social safety net, the country is becoming economically polarized. And the decades-old dominant economic dogma that growing wealth among society’s highest earners would trickle down to those less fortunate is being challenged by an alternative approach: Eliminate crushing poverty among the lowest earners, and wealth will trickle up.
  • The ranks of the working poor have swelled as minimum wages fail to keep pace with rising costs and social assistance levels drop.
  • The recession widened the chasm, and a subsequent recovery hasn’t closed it.
  • On paper, almost as many jobs have been added as were lost during the financial crisis. But they offer fewer hours and less pay – and some of the hardest-hit sectors aren’t coming back.
  • Food bank use hit a record high in 2010. Tellingly, more of the people using those food banks have jobs – they just don’t make enough to pay the bills or feed their families.
  • As the incomes of the country’s top earners have risen, the incomes of Canada’s lower- and middle-income earners have stagnated.
  • Mr. Masciotra is part of a growing group of skilled labourers on the brink. The métiers in which they’ve worked for years are no longer economically viable: Many well-paying blue-collar jobs are being replaced by minimum-wage, service-sector ones. And that’s causing significant shifts on both sides of the border, notes MIT economist David Autor.
  • “I have records of over 100 jobs I have applied for,” he said. “I have looked really hard. ... But I haven’t been able to get a job yet.
  • Tony Masciotra is diversifying himself. The Argentine-Canadian father of two went back to school immediately after being laid off from his tool and die job at Ford Motor Co. in Windsor three years ago.
  • It gets more complicated, and more economically detrimental, if the people who’ve lost jobs aren’t the ones being hired to new ones.
  • They enter what Robin Somerville of the Centre for Spatial Economics calls “structural unemployment.” And if they leave the workforce entirely, they fall off the radar of unemployment stats: The numbers look better precisely because they’re worse.
  • The drop is even more significant because more Canadians are putting off retirement. That should mean more people in the workforce. But it doesn’t: So many younger workers are dropping out entirely that they outweigh the older ones sticking around longer.
  • “If you’re losing opportunities in some areas, and you’re not replacing them with opportunities of equal or greater value, then the overall level of income in the economy is reduced. And the ability of people to go out and buy goods and services is reduced.”
  • Homelessness costs taxpayers money – in both foregone wealth and social service spending.
  • Some see a solution in a 40-year-old experiment: In the 1970s, Manitoba wanted to see what would happen if it guaranteed poor people in a few communities a set annual income.
  • The philosophy behind this is simple: People are more likely to stay in school, out of emergency rooms and out of jail; they contribute to the economy through their purchases; they’re more likely to move eventually above the poverty line and pay taxes.
  • The irony is that Canada already scores high compared to other OECD countries when it comes to helping the elderly. Where it falls short is where it matters: The working-age poor – the ones who should be contributing to the economy.
  • $134,000 Estimated amount for emergency shelter, emergency hospital care, law enforcement and other social services for one homeless person in Calgary, for one year
  • $34,000 Estimated cost to proide supportive housing for one person in Calgary, for one year
  • $12,555 Average cost of hospital stay for non-homeless patient at St. Michael's Hospital in Toronto
  • $15,114 Average cost of hospital stay for homeless patient at St. Michael's Hospital in Toronto
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