According to the UK Guardian, Global financial system is shock-proof, says IMF. Phew. I am so relieved. What with $100 trillion dollars of derivatives, a $500 billion dollar US trade deficit, the largest financial bubble in history just a few years behind us, not to mention fractional reserve banking, I was a bit worried there for....well....a while now. But as of this moment I can relax.
Balance sheets had been strengthened, the report said, with a "paradigm shift" in risk management, particularly among the biggest multinational banks. "Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence ... it is hard to see where systemic threats could come from in the short term."
Risk management is nothing more than everyone running the same computer models, based on the assumptions that historical correlations are stable. This works fine until a crisis, when everyone would tend to want to sell the same things at the same time.
- Given that markets had responded calmly to the increase in interest rates in the US and other parts of the developed world, the report added: "The most immediate risk is that market participants may develop a sense of complacency." Low levels of volatility in bond and stock markets might lead to a return of indiscriminate risk behaviour, thanks to a tendency to "search for yield".
The report fails to mention that the "indiscriminate risk behaviour" is a direct consequence of the moral hazard created by central banks and their chort institutions like the IMF, in standing ready to bail out the financial system's large players whenever they get into trouble.
