September 17, 2008
It may be time to revisit our vocabulary in the light of the financial meltdown. “Safe as a bank” and “safe as houses”– forget them “Insure” – to guarantee or protect against a risk or loss – provided that the insurer remains solvent.
And we need to re-examine the difference between “investing” and “gambling”. To “invest” means to lay out money with the expectation of a profit. To “gamble” is to bet money on the outcome of an event. The difference is in interpretation only.
Lehman’s leverage rate of debt to capital was perhaps 35: it takes little to imagine what may happen in a severe financial downturn. Lehman’s (far from alone) were in effect betting against a severe downturn.
Derivative and other such financial instruments have been devised by whiz kids seeking to maximise profits for their institution (and themselves), which are exceedingly complex and not always fully understood by the buyers or their own management or supervisory authorities.
A thoroughly unsatisfactory state of affairs, particularly in a poorly regulated society. The successful side of capitalism can be measured by the result of failure but non-risk taking individuals are caught up in the ‘remedy’. The US authorities were right to nationalise AIG.
Worst of all for Europe, we have little control over the effects of an American financial meltdown. A highly qualified working group is needed to analyse what has happened and is happening, the lessons to be learned and what action Europe can take.Author : Stanley Crossick