Genesis and Evolution of a Turmoil

The current financial turmoil or upheaval that is with us today and will continue for an indeterminate amount of time – needs to truly be understood.  Re-tracing specific events leading up to a complex series of problems is especially important in fully grasping the situation before embarking on devising a strategy and tactical plan toward a comprehensive vanishment or resolution.

 All systems need essential policy guidance and rules causing behavior to function optimally.  The inclination toward deregulation in the mid 1980’s began various processes that although lofty, were never intended to supplant any “built in stabilizers” or importantly prudential regulation and monitoring.   Without regulatory schemes and mechanisms put into place for risk management, anomaly and turmoil are subject to a high probability of occurrence and with severity.  

Confidence, to be restored, would embrace very determined and decisive action.  Moving to the beginning of these evolutionary processes one might consider, ‘What policy actions could have been instituted that might have created systemic regulatory and prudential framework control?’    These regulatory frameworks are still capable of acting positively today.  The categories contained in the frameworks could be carefully defined and enumerated. 

1.  A concise historical timeline of causal events which led up to this severe economic crisis in the United States and globally inclusive of the dismantling of earlier safeguards that had been put into place.
2. An analysis and re-definition of capitalism by breaking it down to its component parts viz., a) free market theory and b) “financial capitalism” (banking and financial services).  These two concepts are in the main mutually exclusive and need not necessarily be synthesized as one theory.  Too often, “capitalism” and “free enterprise” are used interchangeably although they refer to vastly different concepts.
3. Regulatory anomalies which have occurred over the past 25 years or so which portray a confusing system of financial regulatory frameworks and legislation and have led to a financial services mindset that has been difficult to transcend.  
4. A review of derivatives, especially the unregulated swaps markets, and how their existence has acted to magnify the bursting of an otherwise severe but manageable series of “asset bubbles” into a complexity at a higher “order of magnitude” than has been contemplated in modern times—which has frozen or stultified the capital markets.  As a note, these instruments are termed by some in the investment and banking industries as “welfare enhancing” credit risk transfer instruments — which create diversification and liquidity.  However, the speculative nature and sheer volume of these instruments have been a daunting threat to the international financial system creating a drain on real economies.  Diversification as contemplated by Modern Portfolio Theory, if one subscribes, actually did not intend this type of latent and layered leverage.
5. The adverse effects of unplanned international support systems in terms of credit, interest rate and foreign currency derivatives and the roles played by various dealers and other participants. 
6. A view of the inherent flaws of the Credit Rating Agency system.
7. The concept of “super anti-efficient” or shadow markets and Special Purpose Entities as they relate to the current dilemma.
8. Overview of the inventory and potential default severity of credit instruments (by asset class) held by financial institutions along with relevant accounting procedures.
9. Recommendations for remedial actions in an effort to assuage the current turmoil at its core, and restore a sense of normalcy to the United States economy, and to the global markets.

The construction of this particular turmoil is un-paralleled in its scope.  If it were rendered in something analogous to a set of architectural plans it would indeed look like the creation of a perfect financial crisis—confusing and not easily confronted.  The brightest minds argue over solutions which simply indicate that the whole is not yet defined.   However, it is definable; it is “man-made…”   A full statement of its construction would tend to open up the door to resolution.

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Stephen R. Ganns has more than 30 years of real estate experience in acquisition, management, restructure/workout and financing.