Positive aspects. Financial and stock exchange summersaults grabbed our attention for several days last month, not only in the pages of the economic press but in the main newspapers and media too. We were able to observe, however, a strange contrast between the alarmist and sometimes doom-and-gloom headlines and news with that of the completely different tone in most specialist commentaries, as well as in the declarations made by several political figures that previously had or indeed still have direct responsibility for sectors of the economy and finance. One publication therefore spectacularly highlighted the crisis on the markets and the staggering scale of wealth claimed to have been destroyed in the fall in stock market shares (with fantasist and artificial calculations of millions or billions of Euro supposedly evaporating over the period of just a few hours), whereas commentaries explicitly indicated or at least led us to understand the positive aspects of the knocks endured by pure financial speculation that contributes nothing at all to the real economy and which is only concerned with exploiting economic growth. Most commentators were of the opinion that these summersaults and crises sometimes have a salutary effect because they definitively impose more effective control on the financial markets as well as greater transparency in how they work.
Events last month help highlight the artificial character of certain benefits and rich-pickings that exclusively come from financial acrobatics that border on what is actually legitimate and sometimes even go beyond this limit. It is true that modest and clever investors sometimes make money out of this - they ran the risk, were tempted by the perspective of making easy money and got themselves up to the eye-balls in debt but measures have often been taken to bail them out. We will see in the follow-up whether EU countries that concentrate an excessive part of their economy on purely financial activities, to the detriment of manufacturing goods and farming, will suffer the consequences of this summer's events. I am mainly thinking about countries that are not protected by the single currency and which refused to join the Euro-zone.
Mistakes and abuses in the financial world. The commentaries that I am going to comment upon don not include the intentions of those who oppose the principle of globalisation, the “anti-globalisation” camp. I am instead going to focus on the figures who consider that the international free movement of capital is useful, indeed, indispensable to the channelling of financial resources towards appropriate investment for the benefit of overall economic development. I'll begin with Carlo Azleglio Ciampi who, in his own country, has been governor of the central bank, minister for the economy and finance, prime minister and president of the republic. He has also held senior positions at a European level. He declared, “the financial economy has supremacy; we now need to deal with the real economy in an effort to tackle the tumultuous developments resulting from derivatives, hedge funds and finance that escapes any kind of control”. He calls for caution and reflection and adds that fortunately we have the Euro as an “extraordinary mechanism of stability and cohesion”. He rejects the adjective “excessive” with regard to the development of finance but explains that it has developed in an “abnormal way”, which leads to harmful consequences that require rectification”. “Strengthening control authorities is crucial and rating agencies have to be more cautious in their assessments by taking the influence of stock exchanges more into account”, he states. The language is moderate but in substance it had already been said during the first days of the crisis.
After which come several commentators that have been much more explicit and more severe with regard to the mistakes and abuses committed by the different actors in the world of finance: rating agencies, certain banks, share values and even some central banks. The analyses provided went beyond the pages of the specialist press; the main newspapers attempted to provide an explanation and a degree of clarification.
They explained the mechanisms whereby real estate loans (including sub-prime mortgage loans not backed by sound guarantees) are transformed into securities and included in investment funds and other financial instruments quoted on the stock exchange. It is true that the terminology differs from one language to the next so, if we restrict ourselves to the three languages used by Agence EUROPE, the mechanism is called securitisation in English, titrisation in French and cartolarizzazione in Italian.
The risks. This results in the disappearance of any direct link between the citizen who was granted a real estate loan and the bank granting the loan. Contractual relations between the borrower and the lender no longer exist. The contract becomes an anonymous and impersonal security bought and sold in countless transactions on the financial markets. It becomes practically impossible to know to what extent sub-prime loans make up an investment fund or other financial instruments quoted on the stock exchange. If the first borrower is no longer able to meet his commitments (this mainly happens when the value of the property bought falls rather than grows and no longer covers the debt, as was the case in certain parts of the United States, and especially in Florida and California), then the hedge funds collapse. Even cautious investors can find themselves involved, because rating agencies hand out positive assessments (up to the triple AAA maximum quotation mark) to investment funds that no doubt do not deserve them. It is sometimes these very agencies that advise investors encouraging them to buy on the bonds market partly (and sometimes very largely) composed of high-risk debts, as gains are therefore sizeable for investors and especially for the financial bodies concerned - that is, until the mechanism breaks up.
In the best of worlds, it all works fine - until risks exceed acceptable limits and the financial institutions no longer want (or are able) to take any further risk. The market is therefore deprived of liquidity. This is when the central banks come onto the scene by making the essential liquidity available to the financial markets. Some commentators reproach them for doing so as the certainty that they will be bailed out by the central banks means that financial intermediaries are willing to take excessive risks (albeit highly remunerative risks - until the crisis hits).
Can a crisis prove useful for combating abuse? The situation described above has been considered by commentators in general as abusive and unfair. In my careful reading last month, I did not notice any left/right division over this. There was consistent denunciation on all sides of responsibility and abuse by the financial world. The line and tone taken were generally as follows: upheavals are generally positive, as they allow distortion and unacceptable irregularities to be eliminated and mean that clarity and transparency is brought back to the world of finance. Financial instruments must be to the service of the economy and at least a better balance between financial activity and the production of goods should be restored. The usefulness of certain particularly complicated instruments has been placed in doubt and sometimes even disputed. Such mechanisms are open to speculation and yield can be spectacular but, at the same time, they have no advantages for the real economy and sometimes can even be detrimental to it.
After a silence of several days or weeks, representatives of the financial world have tried to show the positive results and advantages of the variety of mechanisms and instruments created, in a generally moderate tone and drawing some criticism upon themselves.
One must nonetheless underline the fact that this debate - not only the criticism of the aberrations of the financial world but also the modest attempts to defend it - did not hit the press headlines. The first pages were reserved for the abovementioned spectacular aspects, while the detailed comments and criticism that I have briefly summarised were to be found on the specialist pages or in the supplements.
Tomorrow, I shall endeavour to draw a few lessons from this far-reaching debate, by adding a few considerations on a specific aspect that has often been left to one side (apart from a few cautious references): the problem of the dollar and its value. (F.R.)