Rewriting the Financial Stability Report (or the credit boom in a nutshell…)
Posted on May 1, 2008 by Richard Beddard
Filed Under Investing |
A prolonged period of overextension…
For a number of years, low interest rates and benign global economic conditions encouraged higher risk-taking by investors and increased borrowing in parts of the household and corporate sectors. Strong demand for financial services and mark-to-market gains from rising asset prices boosted profitability at financial institutions and stimulated further expansion of activity, including innovation in markets such as structured credit. Financial markets provided a plentiful source of funding for growing balance sheets.
A concise summary, but I’m not sure about the order of the words. It subordinates the actions of the participants in the credit boom to the broad economic trends. I think reordering the words makes the participants more culpable:
A prolonged period of overextension….
For a number of years investors took higher risks and householders and companies borrowed more money without considering whether those risks would be manageable, and those debts affordable, should the benign economic conditions of previous years come to an end. The banks that created the money borrowed by investors, householders and companies made big profits innovating structured debt products and revaluing their own assets at higher ‘mark to market’ prices.
And I question the use of some of the words, and the necessity of some of the jargon. “Innovation“, has a positive connotation that is inappropriate now the banks are writing down the value of billions of dollars of structured credit.
So here’s another attempt:
A prolonged period of overextension…
For years investors took high risks and households borrowed excessively without considering what would happen if the economy slowed down. Meanwhile shortsighted banks created the money and boosted their own profits by repackaging risky debt as safe debt and valuing it at inflated market prices. This only worked, however, until borrowers started defaulting on the debt.
Of course, its not comprehensive and we know the story well, but, all I’m saying is, as the Bank wants to help the public and financial firms prepare and manage for financial crises, it could speak with a clearer voice. Then perhaps it would be more difficult for bankers and borrowers to say, “We didn’t see it coming.”
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