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13/10/2008 Recovery of the world-wide economy
Del is a subject that we cannot stop thinking, since it is in mouth worldwide. The economic situation brought about by failures in the financial system is very worrisome but it is it still more the measures that seem are going away to take do not go to the base of the problem, but are “patches� that once spend some years will return to take off themselves. We will only make a reflection:
“if my neighbor sells my house, and soon tries to buy to give it me it to whom has been bought it, I will denounce to him and will go to the jail�. Then of that same one the sale of action in shortage consists, person in charge of much of the volatileness that there is in the market. It is only necessary to see the quote the day of victory of futures and options to see the volatileness that is generated.
In our opinion two causes for the present economic crisis exist:
- A series of operative financier who does not contribute real value to the economy (that if to the financial organizations). Thanks to these operations the weight of the business of the financial organizations on the total has increased substantially. Before, these organizations with their activity of loan and deposit were a route so that the economic agents made business real, now are a route to make business in itself. The derivatives are contracts that in the majority of the cases are eliminated by differences (the negotiated good is not given but the one that leaves cattle receives in money its positive balance) reason why does not exist no real transaction.
- A real estate bubble favored per years of economic growth maintained and low types of interest. The real estate bubbles much more have a harmful effect on the real economy that the stock-exchange bubbles for two reasons:
- The population has much more inverted in brick that in stock market reason why is more affected people. In Spain it is spoken of which 80% enter and 90% of the saving of the families are in brick whereas only the 10%-20% is in financial investments.
- The real estate market through the construction is intensive in manpower. A crisis in this sector much more generates unemployment that a crisis in the stock market, reason why its effect on the real economy is greater.
All the countries have not been affected by the real estate bubble, EE.UU. the United Kingdom and Spain perhaps is affected, but in Spain we have a double problem, to the ascent of the prices has been united a tremendous growth of the construction activity (in Spain more floors than in the together United Kingdom, France and Germany were constructed and the three countries have more population than Spain individually). In order to measure the effects of a real estate bubble very good call “When Bubbles Burst� published by in a magazine of the International Monetary Fund exists an article.
To solve the crisis brought about by the second point is time question, that the buildings return to their value of market, but the excesses of the financial sector if they must be analyzed and be had in consideration so that it does not return to happen.
- The financial derivatives “are financial products whose value is based on the price of another assets, of their name there�. Initially they had a fundamental activity, cradle in the cover of operations, for example:
- A person who has BBVA action and thinks that they are going to lower, but does not want/can sell them, sold a future (type of derivative) or bought an option put (another type of derivative) to cover itself before a potential loss).
A Spanish company that has sold to another American company in dollars a series of products and that the American company is going to pay within 3 months contract to him a change insurance not to see itself affected by a possible fluctuation of the dollar. As the Spanish company produces in Euros, if the dollar were depreciated could not cover costs because to sold in dollars.
At the moment, the nominal value of the total of negotiated financial derivatives supposes 12 times the world-wide GIP. It is by this so brutal volume that the derivatives can move quotes of action or types of currency change. In addition, of this total of derivatives, a 66% correspond to derivatives on types of interest and another 9% to derivatives on currencies. This 9% on the world-wide total (12 times the GIP) would suppose the 108% of the world-wide GIP, exist derivatives on currencies by the 108% of the world-wide GIP; if we assumed that these operations are for cover of operations of real economy, would suppose that all the sales of the companies of the world have contracted a derivative on types of change. We see therefore that great part of these operations is with a unique speculative aim, which does not contribute no economic value, except for the margin which they acquire the organizations commercialize that them. We are going to put three near examples of operative:
- The last years are had been commercializing in Spain derived on types from interest. A company that had a variable loan to type offered to him to change it to fixed type. This operation can have economic sense, to make sure a maximum cost, but it does not have too much if it is for covering a policy with credit to a year, and if it is not for changing to fixed type, but if it raises of an amount the bank pays and but she is the client who payment. This type of operations has a margin for the financial organization that is the one that is more probable that it makes money.
- Obligatorily� Convertible bonds “. Tenth obligatorily convertible, because normally in this type of instruments the convertibility is an option the holder, not an obligation. We are speaking of the bonds emitted by Banco Santander that if we crumbled are a purchase on credit of action of Banco Santander to 16€ receiving in return a 2.5% on euribor to 5 years. If we consider that the prime one on quote then was of a 20%, it quoted around 13,30€, that 2.5% by 5 years supposes a 12.5%. We are losing money, we are going to pay a 20% by something more than only they give a 12.5% us.
- Bonds emitted by Lehman Brothers and other many emitters. It had the yield ligature to the evolution of raw materials, action, types of interest. One that drew attention to me was. It gave a 9% you if the actions of Popular Bank and BBVA did not lower more of a 20% but they gave in action those you of which it evolved worse. IF beams the calculations, much more leave to you against the account to buy action of Popular Bank and BBVA, only if both quotes were in the rank of until the -20% you left winning.
To which we talked about is to that this type of operations does not contribute value but only they generate benefit to the financial organizations. In the celebrated summit east weekend and where Sarkocy tried “Refundar Capitalism� has reached agreements that does not go to the root of the problem, and is that the financial lobby is powerful.
In an article published recently in The Wall Street Journal a serious proposal is made to solve the excesses that have taken to the present situation. Writing by Judy Shelton with the title “Stable Money is the Key to Recovery� - stable Currencies are the key for the recovery - defends that the return (already they were it in Breton Woods on the basis of the gold standard) to fixed types of change.
Types of fixed changes fluctuating by the differentials of inflation and types of interest between countries would only facilitate the business of real economy since the companies would not worry as much about:
- As it is going to affect currencies to my sales in other countries
- As it affects the raw materials that I need
- As it affects the spending power of my clients
In addition, we understand that the financial derivatives are necessary since they contribute value in the cover of operations, but have economic sense the hiring of these products at speculative level.
Certainly the sides of investment, societies of values and Hedge Funds will defend their existence, but we do not create them necessary. Only with the negotiated ones in organized markets and aims of cover it would be sufficient to cover the needs. As a example we see the relation that has taken to the quote of the dollar and the price of petroleum this last year. The speculation on one of both affected the other directly. There will be one who has made much money speculating on both, but has affected of tremendously negative form the airline companies and the transport generally. Â
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