Global Financial system - more Style than Substance

[LaurieAG]

One thing that amazes me about the political reactions to the recent global financial crisis is that the majority of the solutions merely prop up the existing system without actually doing anything to reform the system and stop the dodgy operators from getting into market leading positions in the first place.

 

Economic downturns come and go but there is one neo construct that accelerates the timing between the inevitable peaks and troughs, Leveraged Buyouts.

 

When a company is purchased with heaps of debt and the new owners screw down on operations and customers to maximise the return to their investors as well as paying off substantial interest and debt payments they become very susceptible to market downturns.

 

Surely any serious sustainable global financial system excludes the participation of these good time guys despite how much money they throw at global politicians and their political parties?

 

The rising price of gold is one indicator that substance is beginning to overtake style in the real world. Lets hope global politicians take heed of this watershed before we have to pay for their mistakes again and again.

[lawcat]

the majority of the solutions merely prop up the existing system without actually doing anything to reform the system

 

There is only one short term solution, as explained in the IMF's report on the Financial crisis of April 2009. The IMF explainsthat "Bank funding markets remain highly stressed and will only recover once counterparty risks lessen." Yet, it is unclear how counterparty risks will lessen when oversupply of inventories, excess money supply, and low interest rates encourage overtrading and further debt increases.

The IMF further explains “The current inability to attract private money suggests that the crisis has deepened,“ therefore markets are not able to attract private investment.(pg. xv.)

The solution is, as IMF urges, that the government “will need to continue to provide ample short-term liquidity to banks, and governments will need to provide liability guarantees, for the foreseeable future.“ http://www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/text.pdf

 

The only change is that the taxpayers are supporting corporate losses.

 

there is one neo construct that accelerates the timing between the inevitable peaks and troughs, Leveraged Buyouts.

 

Leveraged buyout have been around for many decades. The crisis of the 80's was in part due to those, at least in the U.S. Leveraged buyouts are a legitimate part of business strategy. The problems is: leveraged investment in derivatives.

 

When a company is purchased with heaps of debt and the new owners screw down on operations and customers

 

I don't agree that the primary problem of leveraged buyouts is the screw down on operations and customers. Rather, the problem is screw down on vendors, contract holders, other businesses.

 

Surely any serious sustainable global financial system excludes the participation of these good time guys despite how much money they throw at global politicians and their political parties?

 

In U.S. we have laws against unreasonable leveraged buyouts, especially to protect the vendors, but as well as the shareholders. This is part of the laws of corporations in each State and the federal bankruptcy laws. The problem is the enforcement of these laws.

 

The rising price of gold is one indicator that substance is beginning to overtake style in the real world

Not necessarily. This is not a new trend. investors always look for a safer investment. It is always about substance.

[LaurieAG]

Hi Lawcat,

 

There is only one short term solution

 

The roman emperor Tiberius tried the same short term solution thing with similar results, i.e. the money put forward by the 'government' solved the immediate problem, but this was a major cause of inflation and a following emperor gifted a similar amount of 'stimulus' to a favoured ex slave. And that was before things got really bad. What about solutions for long term sustainability?

 

The only change is that the taxpayers are supporting corporate losses.

 

And profits and bonuses.

 

Leveraged buyout have been around for many decades. The crisis of the 80's was in part due to those, at least in the U.S. Leveraged buyouts are a legitimate part of business strategy. The problems is: leveraged investment in derivatives.

 

That still doesn't make LBO's or leveraged derivatives sustainable when the market turns.

 

I don't agree that the primary problem of leveraged buyouts is the screw down on operations and customers. Rather, the problem is screw down on vendors, contract holders, other businesses.

 

You haven't been to Australia lately. The leveraged depreciated user pays leasing system can provide the govt with 1.36 in tax, the leverager 2.56 in profits and the user has to pay 6.00 on 3x leverage for something that should have only cost the govt/user 1.00 in the first place. Does your government hide poor business deals from the public under 'commercial in confidence' agreements? Introducing a 10% goods and services tax and removing its impact from cpi calculations is just another way down that slippery slope.

 

In U.S. we have laws against unreasonable leveraged buyouts, especially to protect the vendors, but as well as the shareholders. This is part of the laws of corporations in each State and the federal bankruptcy laws. The problem is the enforcement of these laws.

 

In Australia our laws allow cartels to operate if there is no 'direct' collusion. But then again our politicians declared their independence in 1986 when they changed Australia's sovereignty status and put forth laws that prevent our state governors from withholding or disallowing (i.e. veto or a 2 year pause before approval) legislation. It's a real pity they still haven't got constitutional approval from the people yet.

 

Not necessarily. This is not a new trend. investors always look for a safer investment. It is always about substance.

 

The substance has jumped in value 300% in a couple of years, especially for US retirees, and it looks like the emperors 'slaves' are getting in line for their rewards and nobody has learnt anything in 2000 years. Thats the problem with short term politicians, particularly Australian ones, they never learn from their past mistakes and don't provide sustainable solutions only short term ones.

 

If we want a sustainable global financial system we should first remove those elements that are not and will never be sustainable in the long term.

[Michaelangelica]

https://www.youtube.com/watch?v=qOP2V_np2c0&feature=player_embedded[media][/media]