Understanding the Financial
CNN's Richard Quest
(CNN)-- From pubs in London to
bars in New York, everyone is asking the same question:
Why is this financial
crisis different? The answer is simple albeit not sexy. The
rot has set in!
will continue to feel the strain until the world's investment
banks can restore the loss of confidence.
world's investment banks are basically houses built on pillars
of money. Sometimes those pillars are cash, often revenue sharing
obligations; these days pillars are made up of
derivatives, swaps, options and other frighteningly
pillars are the strength that supports not only the bank
itself, but also its debts and liabilities. Under technical rules the
pillars have to be transparent and of a certain quality, so
that investors know just how well propped up the
bank is. In layman's terms -- everyone can tell
"the bank is safe!" If the pillars remain strong
-- the bank stays standing.
happened is that the rot has got into the pillars and no-one
noticed. If they were wooden it would be worms. The very financial
instruments that make up the core of the
banks are questionable.
can say for certain how much these instruments are worth, if
anything. No-one knows if counter parties to deals are financially
secure and will be around tomorrow. The very structure
upon which banks like
was happening to just one or two banks then it would be a
"nasty business." But it is happening to all the banks -- at once. The
major names have all been taking on these
dodgy instruments and are all now seeking better
quality investments and cash. And of course
those with the cash want to keep it to themselves,
in case they need it -- hence the term credit
during a period of financial turmoil there are clearly
definable events -- oil crises, war,
of terror -- which cause a
loss of confidence which leads to a slowdown and possibly
infrastructure of the banks remains by-and-large solid. The
pillars remain standing. Here the exact opposite is happening. Every event
merely puts dodgy pillars under more strain
and eventually they give way.
what links today's crises with those of the past: 1929 Wall
Street Crash; 1970's Oil Crises; Black Monday, 1987; the Dot Com bubble
bursting in 1998. In all cases it wasn't just a turn
of the economic cycle gone wrong, it was a
problem at the very core of the financial system
size and scale meant everyone was affected and from which
this play out? Badly!
the financial pillars can be rebuilt then there is little
anyone can do but watch some banks get rescued,
while others collapse completely.
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the above report one might conclude that the financial pillars
cannot be “patched up”…
they must be rebuilt.
over the last few days by governments are laudable, but (in
effect) printing more money to
throw into the
situation might create an even greater
is, if the new pile of “paper” doesn’t smother the flames, it
may ignite and carry the
firestorm right back up-line to burn down the “printing
even if visible flames are smothered, smoldering should be
expected to continue until a
The problem is that, for world currencies to
function properly, they were detached from real-world
back in 1971 when
President Nixon took the USD off the “gold
long as monetary transactions continued to be played out
primarily in commercial markets, that
good thing – commerce provided the base, finance was a means of
financial markets began to far overshadow commerce, inflated
values of money, revenue sharing obligations, and stocks should not
have been expected to carry the weight when real world
So, we are where we
are and where can we go from
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