Wednesday, 11 March 2009

Smoke, mirrors and bailouts

The financial technocracy is really having to stretch to explain the miscalculations of the last few years and to reinforce the message that fiscal health can be restored to the global economy as long as financial markets are allowed to flourish again through innovation and dynamism.

Alan Greenspan in a piece in the Wall Street Journal , which was primarily designed to exonerate himself from any suggestion that it was his own management of short term interest rates that was a primary cause of the current financial crisis, makes the point that we will have to rely upon the dynamism of the private sector to ensure future prosperity

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr Greenspan’s successor was also keen to emphasize the need for financial innovation in his address to the Council on Foreign Relations in Washington.

While there was really nothing surprising in his remarks, perhaps the most interesting part of the speech was right at the end when he said - "it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system."

Sounds like financial engineers can breathe a sigh of relief and also sounds like taxpayers should be ready for another bailout after we get through with this one.

But for me, at least, the real quote of the week must surely be from Tim Geithner who was interviewed on the Charlie Rose show and expressed the current challenge in these inimitable words.

"There’s capital that wants to come into the system, but it just can’t get financing".

In a sentence there truly is the Enigma (i.e. smoke and mirrors) of Modern Finance.

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