I'm writing this as I listen to, "Kiss them for me," by Siouxsie and the Banshees. Punk fusion is how I describe the song, a style that seems fitting for this particular blog because what I'm about to say may sound radical but with keeping it simple in mind, it could work.
We know how we have suffered in recent years at the hands of bankers and financial institutions who still hold us to ransom. Without wishing to state the obvious, the crisis arose because money was lent to borrowers and home buyers who were unlikely to repay the loans. Banks then sold these bad debts to others via elaborate financial instruments in unregulated markets and hedge funds. The result being that most pensioners (except in Greece) now live on a reduced pension and the people responsible for the mess retire on six and seven figure pension pots.
There is no doubt that complicated financial instruments were partly why the credit crunch happened. My question is: just because we know how to design complex and weird financial instruments and markets, do we actually need them? Take the vanilla interest rate swap. It only comes into play when banks lend at floating rates and want to pass their interest rate risk to the borrower who then takes out a swap to pass the same risk to a third party. If banks lent at fixed rates, then the swap becomes redundant.
For anyone who doesn't know, financial markets get everywhere and even pork bellies are traded (before being covered in sticky BBQ sauce.) In doing this, an unnecessary secondary market has been created. Meat processors could buy directly from farmers through a fixed price contract. Job done. The risk stays with the business instead of being passed to the rest of us via the Stock Exchange. No need for bull call spreads, bear put spreads, put or call options or a financial Irish jig. By introducing the flexibility and risk passing of financial instruments, we've unnecessarily turned business risk into our financial risk and added to the ever growing glossary of strange words.
Then there's intricate funds like pension, hedge, or sovereign wealth, which actually don't need to be anything more than a mix of equities and savings accounts. A pension fund could buy and sell shares on the Stock Exchange and invest in bank savings accounts. It doesn't have to involve financial wizardry.
Similarly, a bond is another word for a loan. "Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk and yield curve risk." Yeah, we don't really need this much complexity. You lend to the government at a fixed rate for a fixed term. Job done. Countries could also lend to and borrow from each other. Fixed term, fixed rate.
What has happened over the years is that capital markets have evolved because the wealthy like taking risks; and academics run around developing theories and financial instruments because they need to do something with their infinite brains. You could always use your intellect for the benefit of medical research, people.
Now we come to the bankers. All we really need a banking system for is to hold current, savings and loan accounts. We don't need an inter-bank lending rate scandal (LIBOR), swish parties for bank executives after a public bail-out, nor a hard sell on Payment Protection Insurance (PPI) that gave rise to the secondary market of annoying phone calls trying to reimburse the hard sell.
Now we've gone this far down the road, we might as well go the whole hog and do away with pounds, yen, dollars and the euro and have just one global currency. Strengths of different economies would be represented by differing prices in each country.
So - is it likely we could simplify the financial systems to this extent? Not while the brokers, bankers and economists continue to hold us to ransom with their financial and economic models. There may be an appetite for complexity by a few but they haven't actually made the world a better place.
I'll end by saying that it would take a brave person to try and simplify the world of banking, finance and economics. But then again, who'd have thought there'd be an Arab Spring in 2010 or that the Berlin Wall would come down?
In the words of Rohini: I think they make it hard just to make themselves look clever.
Written slowly by iPhone and autocorrect thanks to SKY and BT not talking to each other and leaving me without broadband for a week.
We know how we have suffered in recent years at the hands of bankers and financial institutions who still hold us to ransom. Without wishing to state the obvious, the crisis arose because money was lent to borrowers and home buyers who were unlikely to repay the loans. Banks then sold these bad debts to others via elaborate financial instruments in unregulated markets and hedge funds. The result being that most pensioners (except in Greece) now live on a reduced pension and the people responsible for the mess retire on six and seven figure pension pots.
There is no doubt that complicated financial instruments were partly why the credit crunch happened. My question is: just because we know how to design complex and weird financial instruments and markets, do we actually need them? Take the vanilla interest rate swap. It only comes into play when banks lend at floating rates and want to pass their interest rate risk to the borrower who then takes out a swap to pass the same risk to a third party. If banks lent at fixed rates, then the swap becomes redundant.
For anyone who doesn't know, financial markets get everywhere and even pork bellies are traded (before being covered in sticky BBQ sauce.) In doing this, an unnecessary secondary market has been created. Meat processors could buy directly from farmers through a fixed price contract. Job done. The risk stays with the business instead of being passed to the rest of us via the Stock Exchange. No need for bull call spreads, bear put spreads, put or call options or a financial Irish jig. By introducing the flexibility and risk passing of financial instruments, we've unnecessarily turned business risk into our financial risk and added to the ever growing glossary of strange words.
Then there's intricate funds like pension, hedge, or sovereign wealth, which actually don't need to be anything more than a mix of equities and savings accounts. A pension fund could buy and sell shares on the Stock Exchange and invest in bank savings accounts. It doesn't have to involve financial wizardry.
Similarly, a bond is another word for a loan. "Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk and yield curve risk." Yeah, we don't really need this much complexity. You lend to the government at a fixed rate for a fixed term. Job done. Countries could also lend to and borrow from each other. Fixed term, fixed rate.
What has happened over the years is that capital markets have evolved because the wealthy like taking risks; and academics run around developing theories and financial instruments because they need to do something with their infinite brains. You could always use your intellect for the benefit of medical research, people.
Now we come to the bankers. All we really need a banking system for is to hold current, savings and loan accounts. We don't need an inter-bank lending rate scandal (LIBOR), swish parties for bank executives after a public bail-out, nor a hard sell on Payment Protection Insurance (PPI) that gave rise to the secondary market of annoying phone calls trying to reimburse the hard sell.
Now we've gone this far down the road, we might as well go the whole hog and do away with pounds, yen, dollars and the euro and have just one global currency. Strengths of different economies would be represented by differing prices in each country.
So - is it likely we could simplify the financial systems to this extent? Not while the brokers, bankers and economists continue to hold us to ransom with their financial and economic models. There may be an appetite for complexity by a few but they haven't actually made the world a better place.
I'll end by saying that it would take a brave person to try and simplify the world of banking, finance and economics. But then again, who'd have thought there'd be an Arab Spring in 2010 or that the Berlin Wall would come down?
In the words of Rohini: I think they make it hard just to make themselves look clever.
Written slowly by iPhone and autocorrect thanks to SKY and BT not talking to each other and leaving me without broadband for a week.
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