“The first crisis to change the financial system for e v e r”


In this Blog I would like to stress out my perspective on the ongoing financial crises and how the things currently really look like. The crisis is bottomless, meaning because it is - the first crisis in the history of globalization, which crashes the old systems. We now live in the world which is very dynamic, and that after the changes the financial system will exist under the new rules. The old financial system of Wall Street with its traditional rules ceased to exist. This is obvious. How will the new one look like? Right before our eyes the new rules are coming to life. However how much time it would take for them to form, no one knows.
Today the old traditional methods of regulation are not working. For instance in America for an entire past year, the financial authorities are trying to use monetary policies in order to manage the economy through changing and lowering refinancing rate. Earlier it worked, previously through lowering the rates, the stock market grew. Now the rates being decreased, however the stock market still crashing down, and now US is nationalizing, investing and spending.
My main point is that the virtual world of derivatives, which is estimated at several hundred trillion dollars, which is greater than the real money market, which is actually a huge amount of quasi-money, which for a long time did not impact on the situation in the world economy (only indirectly). And all the regulators of the world have looked pass it. When the liquidity problems commenced, the virtual world suddenly became real. The financial system, accustomed to the high level of quasi-money started to need them in reality. Now the compression is happening.
I try to explain what exactly I mean: imagine that you - the bank, me - the customer. I came to you in order to borrow 100 million at 10% per annual. I began building the plant, and you decide before the end of construction to issue derivative and sell it on the market by sharing part of the income from the interest. Then the derivative can still be split and resold several times. I got bankrupt and the plant is not built. However the derivative lives its own independent life, as real and valuable share, meaning that it turns out that derivatives became unsecured inflationary tool.
All this - mathematics, but the math must at some point end, so it did. And in some ways the current crisis is a crisis of confidence to liquidity, because the economics seem in order with the average growth of 3.5%, even though slower then projected before.

However the trust was lost. When the banking system is lacking trust, it is impossible to work, because it is not clear who is stable, who is unstable. Where once people were aware that here, for example, those monsters on Wall Street are forever, but now they do not exist anymore.
What we witness today is totally new crisis, which effects the global economy, which has never happened before. The crisis in a way is similar to the «great depression». Only then it was the crises of the single country, but now it has spread because of problems in America around the world. The world has become interrelated downhill crashing force.
The peculiarity of this crisis is that countries which have more developed stock markets and financial instruments, including derivatives, caught in a more difficult situation, for example, than Russia. But to say that we did not get affected by the global crisis, would be a very much wrong thing. In doing so, we have more opportunities not only to minimize the impact of the crisis, but also to make some expansion in the world markets. In the following blogs I might discuss the last point more closely.