Wait a minute

Commentaries on life, liberty, and everything in between.

Filed under: Risk

Wait a minute – 7.770.000.000.000US$

Bernanke-eyes
In an article published last Monday, Bloomberg where able to lift the veil on how severe the 2007 financial crisis really where. They could disclose that doing the period from 2007 to 2009 the US Central Bank, the Federal Reserve, lent banks from throughout the world an aggregate 7.77 trillion US$. Since this where a loan, and since most of the money where paid back the Federal Reserve made a profit of around 13 billion US$ from the 190 financial institutions that to advantage of the below-market rates that the Federal Reserve offered, rates that in December 2008 whereas low as 0.01, basically what would be considered to be free money. One of those 190 institutions that took advantage of these opportune loans where the Danish bank ‘Danske Bank’, they paid 17.5M US$ in interests on loans from the US Federal Reserve.

The dilemma with these ambiguous programs, is not so much that the Federal Reserve did not tell the lawmakers about the lending program, or that the interest that the different financial institutions have paid on the loans, even though that personally I am happy to not be a costumer or a shareholder in Danske Bank, since they are the two groups that in the end is paying the bill. No the dilemma is that the program where hidden from everyone.

Information is a basic necessity in any market economy. The more information that there is available the better the market will function because the better the individual actor in the market can evaluate and estimate risk, and ultimately make the best possible decisions. But if there is, or just the risk of they're being a hole of 7.77 trillion US$ that are an extreme relevant information that the market needs. If that information isn’t brought to the market, then entrepreneurs, costumers, and investors will be taking some unnecessary risk that in the end will require more security to ensure ‘the system’.  Secrecy then becomes a self-sustaining element within the financial system, an element that will reduce the effectiveness which the market functions.

But, what I personally see as the biggest dilemma would be that when the Federal Reserve is covering up the risk that the financial institutions are facing, and then there the most likely reactions form society will be a call for more regulation of the financial institution as a means to mediate the risk that is inherent in the financial institution. That is a dilemma I would argue that the more regulation there is the more risk seeking the financial institution becomes, and the more unaware of the risk then entrepreneurs, costumers, and investors become. Meaning that in the end the risk that we where trying to avoid or at least manage then become a latent part of a less effective market system.

In the end, the price of doing business with the financial institution should reflect the risk of that business, but for that to happen the financial institutions needs to be more transparent so that the risk can be evaluated and price, accordingly.

 
Posterous theme by Cory Watilo