Topic: Economics
EU Central Bank's Revolutionary Idea: Market Transparency The policy makers during the semi-annual summit advocated a revolutionary idea in the financial markets, both for the EU and other G7 nations: market transparency. The EU has made a call to the financial institutions to account in full for their off-balance-sheet transactions.by jposty
(Libertarian)
Sunday, April 6, 2008
Market turmoil, variable exchange rates and stagflation are taking its toll on the EU economy, chief finance ministers and central bankers stated over the weekend.
The policy makers during the semi-annual summit advocated a revolutionary idea in the financial markets, both for the EU and other G7 nations: market transparency. The EU has made a call to the financial institutions to account in full for their off-balance-sheet transactions.
Under the current worldwide financial racket, banks can package debt as a commodity and then trade them on the open market. The banks make the initial profit on commissions and other closing related fees then gets the added benefit of not being completely responsible for the debt. Investment banks then are able to go in and purchase these highly volatile funds and keep them off the books in a structured vehicle. The true level of bank's involvement in this practice is not fully known, but many experts claim Bear Stearn was the canary in the mine shaft.
Transparency will do little to correct the current situation, but it is vital to understand the depth and scope of the market's troubles this practice has caused. To address the underlying problem, monetary policy must be examined. Practices such as the Fractional Banking System breed poor business practices and mal-investment. The credit and mortgage agencies suffered from a government induced habit of not lending wisely.
Fractional-Reserve Banking allows banks to essential loan more money the more money they loan. Once a financial institution makes a loan, they are able to theoretically claim the assumed profit on the interest as an asset and instantly create new loans back by that assumed interest repayment as a collateral on the principle itself. Thus once they loan money, they instantly have more money to loan.
When these lenders are rewarded from lending, why then would they engage in such practices as ensuring their client could actually payback the loan? America's current sub-prime crisis was directly influenced by this practice, once individual's credit bubbles popped, people en masse were unable to continue making payments on their mortgage: domino effect.
Until these financial institutions that engaged in this shadowy practice of debt trading is made public and open to not only government regulators but also the regulator-in-chief the free-market this economic downturn will continue. The EU has made a great first step, now the US needs to take heed and concentrate on fully determining the extent of the problem, before it can proceed on to the next step: corporate responsibility and a sound monetary policy.
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2008 jposty, all rights reserved.
Published: Sunday, April 6, 2008
Last modified: Sunday, April 6, 2008
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2008 jposty, all rights reserved.