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Mix-Ansicht- Is The Financial System More Prone To 'Capsizing' Now? - Cosa, 28.05.2002, 19:42
- Re: netter vergleich...:-) (owt) - tas, 28.05.2002, 22:40
Is The Financial System More Prone To 'Capsizing' Now?
<FONT SIZE="4">Is The Financial System More Prone To"Capsizing" Now?</font>
May 24, 2002
Years ago, pleasure sailboats were designed and built for seaworthiness. This was before at-sea Coast Guard helicopter rescues, more reliable radio communication, Epirbs, and in-water survival suits. In other words, if a sailor was caught in a storm, he could not count on the government coming to his rescue in time to save his life. Rather, he had better have a seaworthy craft under him if he did not want to pay a premature visit to Davey Jones' Locker.
But seaworthiness comes at a price - a price in terms of dollars, speed, and versatility. A more seaworthy craft is built with heavy-duty materials, with a deeper keel, with more ballast in the keel, and with less beam. Obviously, the heavy-duty materials add to the production cost of the boat. The heavier ballast cuts down the boat's speed. The deeper keel limits your sailing to deeper water. And the narrower beam limits the below-decks living space.
Today, skippers care less about seaworthiness and more about cost, speed, and versatility. I am not sure whether this came about (no pun intended) because of improved government search-and-rescue services, or whether improved search-and-rescue services came about because of flimsier craft. But whatever the case, there is a greater chance of capsizing in a boat built today as compared to one built 50 years ago.
I wonder if the financial system has not gone through a similar transition. That is, I wonder if it takes less of a"storm" to capsize the financial system today than it did a couple of decades ago. Chart 1 (inspired by Jim Puplava, Financial Sense Online,"Rogue Waves & Standard Deviations - Part 1" http://www.financialsense.com/stormwatch/oldupdates/2002/0426.htm) suggests as much. Notice that in the 1970s and early 1980s, it took a relatively large increase in the fed funds rate to elicit a financial crisis. As the 1980s wore on, it took less a funds rate increase to trigger a financial crisis. And, in the 1990s, especially the second half of the 1990s, it took even less a funds rate increase to roil the system. Heck, even now, with the funds rate stable at its lowest level in four decades, the financial system has having trouble staying upright.
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Chart 3 shows financial debt as a percent of the nominal capital stock. This percentage has moved up steadily throughout the postwar period. But notice that in the second half of the 1980s and the second half of the 1990s, there was a sharp acceleration in this ratio, as evidenced by the 5-year growth rates. The 1980s were the era of the leveraged buyouts; the 1990s were the era of the leveraged buybacks. And, of course, over the past two decades, that eighth wonder of the world, the one Alan Greenspan holds in awe, the financial derivative, came into its own. So, it takes more and more financial debt (financial engineering and/or intermediation) now to support a dollar of our capital stock. That's progress!?
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Leverage is wonderful for the return on capital when the financial and economic weather is fair. But, when a storm hits, leverage can quickly capsize a country, a company, or a household. And this is where Commodore Greenspan of the US Financial Coast Guard enters. When the financial seas start to get choppy, Commodore Greenspan comes to the fleet's rescue either by restraining increases in the fed funds rate or by cutting the rate. The commodore knows that today's financial fleet is the least seaworthy in the postwar period.
The weather is now starting to take a turn for the worse, as evidenced by rising inflation expectations and a depreciating dollar. Commodore Greenspan already is rescuing some of the flimsiest of boats by keeping a lid on the funds rate. But what if the winds start to howl and the waves build later this year to the extent that Commodore Greenspan can't launch an effective rescue mission? Only those craft with a lot of financial ballast are likely to survive.
Paul Kasriel
Director of Economic Research
Quelle
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