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Source link: http://blog.mises.org/2487/imf-worlds-financial-system-in-great-shape/

IMF: World’s Financial System in Great Shape

September 16, 2004 by

According to the UK Guardian, Global financial system is shock-proof, says IMF. Phew. I am so relieved. What with $100 trillion dollars of derivatives, a $500 billion dollar US trade deficit, the largest financial bubble in history just a few years behind us, not to mention fractional reserve banking, I was a bit worried there for….well….a while now. But as of this moment I can relax.

    Balance sheets had been strengthened, the report said, with a “paradigm shift” in risk management, particularly among the biggest multinational banks. “Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence … it is hard to see where systemic threats could come from in the short term.”
Risk management is nothing more than everyone running the same computer models, based on the assumptions that historical correlations are stable. This works fine until a crisis, when everyone would tend to want to sell the same things at the same time.
    Given that markets had responded calmly to the increase in interest rates in the US and other parts of the developed world, the report added: “The most immediate risk is that market participants may develop a sense of complacency.” Low levels of volatility in bond and stock markets might lead to a return of indiscriminate risk behaviour, thanks to a tendency to “search for yield”.
The report fails to mention that the “indiscriminate risk behaviour” is a direct consequence of the moral hazard created by central banks and their chort institutions like the IMF, in standing ready to bail out the financial system’s large players whenever they get into trouble.

{ 6 comments }

bob September 17, 2004 at 9:14 am

truth is truth and never needs defending….

the more the state insists something is true, the more certain it isn’t

if the system were shock proof it would go with out saying ……. only propaganda needs a platform not the truth

tz September 17, 2004 at 9:39 am

How many days was it between the “Stocks are at a Permanently High Plateau” pronouncement and the big 10/29 crash?

They are correct in one sense. The small shocks will all be absorbed until one comes along that can’t and then the whole system will blow up.

It won’t be so much a cascade failure as an instantaneous seize-up of the credit system since (per Doug Nolan at Prudent Bear) the problem is at the core – or put another way, at the nodes instead of the links.

bob September 17, 2004 at 10:30 am

After LTCM I am not sure how anyone can make a statement like “shock proof”

if not for quick government intervention LTCM would have taken down the financial system

and in many ways that intervention has planted the seeds to an even greater moral hazard

to big to fail is the mantra of many of the participants in the system (GSE for example)

the risk is too many participants believe they would get bailed out in a crisis….shocks come from over confidence and over optimism….

Ike Hall September 17, 2004 at 11:21 pm

Sometimes I wonder if Kurt Vonnegut didn’t foresee the ending of the fiat currency crisis:

Neighboring Peru and Columbia were bankrupt, too… Mexico and Chile and Brazil and Argentina were likewise bankrupt–and Indonesia and the Phillipines and Pakistan and India and Thailand and Italy and Ireland and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. Persons with anything life sustaining to sell, fellow citizens as well as foreigners, were refusing to exchange their goods for money. They were suddenly saying to people with nothing but paper representations of wealth, “Wake up, you idiots! Whatever made you think paper was so valuable?”

Galapagos, pp. 24-25

buzzo September 19, 2004 at 3:01 am

I am shockproof! Yarr!

KomradeGael January 10, 2007 at 11:04 pm

Yarr! Lol, yes we all are shockproof. Everyone, do you patriotic duty to only elect officials that promise to use Congress’ legal authority to shut down the Federal Reserve, this whole scam of lending money that they get out of thin air and worthless paper will be the death of us all. And economy has nothing to do with this, just let the logic seep in, that’s good enough for most and thankfully enough proof for the sham. Nevermind the issues of the Federal Reserve Act not being passed with a proper Constitutional amendment or the 16th amendment being legally ratified, etc.

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