Tachyon Flare
03-25-2003, 05:43 AM
The collected quotes from EIR Magazine (www.larouchepub.com/eir)
Fight Over Derivatives Crash, Hyperinflation
Federal Reserve Chairman Sir Alan Greenspan: These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter-century
ago . . .
More fundamentally, we should recognize that if we choose to enjoy the advantages of a system of leveraged financial intermediaries, the burden of managing risk in the financial system will not lie with the private sector alone. Leveraging always carries with it the remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in a financial implosion if it proceeds unchecked. Only a central bank, with its unlimited power to create money, can with a high probability thwart such a process before it becomes destructive. Hence, central banks have, of necessity, been drawn into becoming lenders of last resort.
But implicit in such a role is the assumption that the burden of risk arising from extreme outcomes will in some way be allocated between the public and private sectors. Thus, central banks are led to provide what essentially amounts to catastrophic financial insurance coverage.
—to Council on Foreign Relations, Nov. 19, 2002
Fed Governor Ben Bernanke: The U.S. government has a technology called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes, at essentially no cost.
—to National Economics Club, Nov. 21, 2002
Germany's Bundesbank: The vast majority of OTC [over-the-counter] derivatives transactions take place between internationally operating banks or other financial institutions. The market is very concentrated: Just over half of all transactions in OTC interest rate derivatives takes place among some 60 institutions, of which seven are in Germany. In some areas, there are only a handful of players that account for the majority of turnover. Less than 10% of OTC transactions in derivatives is conducted with end customers outside the financial sector. ... Derivatives have certain properties which may have a destabilizing impact....
As things stand at present, there are no empirically corroborated findings on the impact that the sudden collapse of a major market maker can have on financial system stability. There are indications, however, that the derivatives markets are sufficiently liquid to allow the unwinding of sizeable positions without causing major dislocations. More problematical than the collapse of individual institutions, however, is a critical situation that affects several institutions at once. The events of September and October 1998 show that, under such circumstances, the limits of the markets' resilience may soon be reached.
—Monthly Report for January 2003
U.S. Office of Federal Housing Enterprise Oversight: [A default of Fannie Mae or Freddie Mac on its debt] could lead to contagious illiquidity in the market for those [debt] securities, [and] cause or worsen liquidity problems at other financial institutions ... potentially leading to a systemic event.
Between 1980 and 1995, over 130 of the member nations of the IMF—including the U.S.—experienced significant problems in their banking sectors that took the form of widespread failures, suspensions of the convertibility of bank liabilities, or large-scale government financial assistance to banks. Currency crises—speculative attacks on the value and devaluations of currencies, followed by efforts to defend that value by expending foreign reserves or raising interest rates— occurred in Europe in 1991-93, Latin America in 1994-95, and East Asia in 1997-98.
— " Systemic Risk" report of Feb. 4, 2003
Berkshire Hathaway Chairman Warren Buffett: [My partner Charlie Munger and I] are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.... The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen).
The macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who, in addition, trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I've mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength—for the sake of our owners, creditors, poli-cyholders, and employees. We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateral-ized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
—Letter to shareholders, Feb. 21,2003, published March 3, 2003
Alan Greenspan: The growth of OTC derivatives over the past 20 years has been spectacular and shows no obvious signs of abating. The latest estimate by the Bank for International Settlements of the worldwide notional amount of OTC derivatives outstanding reached $128 trillion in June 2002, a figure more than 25% larger than that recorded a year earlier. Such derivatives have become indispensable risk-management tools.
—to Banque de France International Symposium in Paris, March 7, 2003
Former Fed Governor and Commodities Futures Trading Commissioner Susan Phillips:
In many ways, derivatives provide stability to our markets, but they are instruments only for people who want to be in that business and have the expertise to do the valuations. We have seen a lot of volatility in markets recently, and if this had happened 15 or 20 years ago, we would have seen a lot of bank failures and failures of brokerages. The use of derivatives has helped shore up the financial system.
Fight Over Derivatives Crash, Hyperinflation
Federal Reserve Chairman Sir Alan Greenspan: These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter-century
ago . . .
More fundamentally, we should recognize that if we choose to enjoy the advantages of a system of leveraged financial intermediaries, the burden of managing risk in the financial system will not lie with the private sector alone. Leveraging always carries with it the remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in a financial implosion if it proceeds unchecked. Only a central bank, with its unlimited power to create money, can with a high probability thwart such a process before it becomes destructive. Hence, central banks have, of necessity, been drawn into becoming lenders of last resort.
But implicit in such a role is the assumption that the burden of risk arising from extreme outcomes will in some way be allocated between the public and private sectors. Thus, central banks are led to provide what essentially amounts to catastrophic financial insurance coverage.
—to Council on Foreign Relations, Nov. 19, 2002
Fed Governor Ben Bernanke: The U.S. government has a technology called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes, at essentially no cost.
—to National Economics Club, Nov. 21, 2002
Germany's Bundesbank: The vast majority of OTC [over-the-counter] derivatives transactions take place between internationally operating banks or other financial institutions. The market is very concentrated: Just over half of all transactions in OTC interest rate derivatives takes place among some 60 institutions, of which seven are in Germany. In some areas, there are only a handful of players that account for the majority of turnover. Less than 10% of OTC transactions in derivatives is conducted with end customers outside the financial sector. ... Derivatives have certain properties which may have a destabilizing impact....
As things stand at present, there are no empirically corroborated findings on the impact that the sudden collapse of a major market maker can have on financial system stability. There are indications, however, that the derivatives markets are sufficiently liquid to allow the unwinding of sizeable positions without causing major dislocations. More problematical than the collapse of individual institutions, however, is a critical situation that affects several institutions at once. The events of September and October 1998 show that, under such circumstances, the limits of the markets' resilience may soon be reached.
—Monthly Report for January 2003
U.S. Office of Federal Housing Enterprise Oversight: [A default of Fannie Mae or Freddie Mac on its debt] could lead to contagious illiquidity in the market for those [debt] securities, [and] cause or worsen liquidity problems at other financial institutions ... potentially leading to a systemic event.
Between 1980 and 1995, over 130 of the member nations of the IMF—including the U.S.—experienced significant problems in their banking sectors that took the form of widespread failures, suspensions of the convertibility of bank liabilities, or large-scale government financial assistance to banks. Currency crises—speculative attacks on the value and devaluations of currencies, followed by efforts to defend that value by expending foreign reserves or raising interest rates— occurred in Europe in 1991-93, Latin America in 1994-95, and East Asia in 1997-98.
— " Systemic Risk" report of Feb. 4, 2003
Berkshire Hathaway Chairman Warren Buffett: [My partner Charlie Munger and I] are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.... The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen).
The macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who, in addition, trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I've mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength—for the sake of our owners, creditors, poli-cyholders, and employees. We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateral-ized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
—Letter to shareholders, Feb. 21,2003, published March 3, 2003
Alan Greenspan: The growth of OTC derivatives over the past 20 years has been spectacular and shows no obvious signs of abating. The latest estimate by the Bank for International Settlements of the worldwide notional amount of OTC derivatives outstanding reached $128 trillion in June 2002, a figure more than 25% larger than that recorded a year earlier. Such derivatives have become indispensable risk-management tools.
—to Banque de France International Symposium in Paris, March 7, 2003
Former Fed Governor and Commodities Futures Trading Commissioner Susan Phillips:
In many ways, derivatives provide stability to our markets, but they are instruments only for people who want to be in that business and have the expertise to do the valuations. We have seen a lot of volatility in markets recently, and if this had happened 15 or 20 years ago, we would have seen a lot of bank failures and failures of brokerages. The use of derivatives has helped shore up the financial system.