Dane Commisiong -

Posted by Keith Clifton 
 

 Atlantica will present a conference on the current financial crisis, and the economic outlook for 2009-2010. The event takes place on March 23, 2009 at the Fairmont Hamilton Princess Hotel featuring seven presentations on the global economy and current financial conditions by independent, and notable, economists and financial analysts who have worked in the global capital markets, government, and academia. The Platinum sponsor of the event is the Ministry of Finance of the Government of Bermuda.

 

            What are the root causes of this financial and economic catastrophe?

 

1.      The three core rules of financial risk management had become burdensome to the global banking and financial institutions and, to their peril, were routinely ignored after 2000. Those rules are:

1-      Never ignore the output of the capital asset pricing model. (You must consider returns only within the context of the risk that the getting of those returns presents.)

2-      Never forget the "no-arbitrage" rule of finance. (There is no such thing as a free lunch, really there isn't!)

3-      Remember the benefits of portfolio diversification. (Never put all your eggs in one basket.)

2.      The collapse of the global housing market bubble in the US, Spain, Ireland, the UK, Dubai, and else where, which had been fuelled by easy credit conditions. It is estimated by the US National Association of Realtors that as much as 40% of all US real estate purchases between 2000 and 2006 were for speculation. US Housing prices rose 150% from 1996 to the 2006 peak, or 15% per year. With US population growth only around 1%, and average GDP growth since the end of WW2 of about 3%, it was clearly predictable that prices would fall with the economic and credit cycle. Sharply rising interest rates from 2004 to 2006, and the slowing economy, killed the speculative bid for US housing allowing prices to top-out and fall.

3.      Widespread poor mortgage underwriting and structuring practices by lenders. Many of these loans would have been unrepayable in even the best economic environment. Proof of this is the near $26 billion lost by the US banking industry, in aggregate, in the fourth quarter of 2008 alone.

4.      Lack of any regulation of participants in the loan securitization markets - "the shadow banking system".

5.      Poor regulation and supervision of the lending practices of financial institutions, and lax supervision of the capital markets activities of listed corporations and fund managers by the SEC, especially in the area of the amount of leverage on balance sheets.

6.      The continued destruction of the Western Middle and Working Classes by the over 30-years long, unimpeded transfer of industrial manufacturing jobs, technology, and ultimately wealth, to China, the rest of Asia, and the countries of the former eastern bloc. Failure to replace these transferred industries with new technological industries resulted in huge trade and current account imbalances that have left western countries overly dependent on credit-fuelled consumption.

7.      The already underway and widely written about, retirement of the 85 million strong Baby-boomer generation in the US. They are, by necessity, selling assets to raise funds for retirement, keeping housing prices and stocks under pressure. Four million per year will retire over the next 20 years. (Soprano's, spec home / boomer analogy).

 

      100% of the foregoing information is already known. The value of the March 23rd conference is not its ability to simply layout the order of past events, but rather in its systematic and philosophical descriptions and forecasts of the probable outcomes and ramifications of this historic, once in a generation, economic and financial crisis.