Tags: Swiss | franc | currency | financial

Layers and Players — Digestion of Swiss Move

By    |   Tuesday, 20 Jan 2015 09:00 AM

It could be that we have already seen the No. 1 financial story of 2015 — the decision last week by the Swiss National Bank to let the franc float upward, a decision they evidently made without consulting central bankers and finance ministers of other leading countries. Certainly International Monetary Fund Managing Director Christine Lagarde seemed shocked when interviewed by CNBC's Steve Liesman after speaking to the Council on Foreign Relations, complaining about "asynchronous" policies of monetary authorities, and not even mentioning this move.

It has been a major theme of these articles that the financial crisis did not just spring up in 2008, but rather is permanent and ongoing, dating back at least half a century. A longer-term view is that the Federal Reserve itself was established a century ago to stave off financial panics, and it did not succeed. Rather, the institution of the Greenspan put, later the Bernanke put and now the Yellen put, plus the acquiescence of the authorities in "too big to fail" financial institutions operating on mostly political capital, has created incentives for managers to take greater risk, in order to maximize the value of the put and drive their returns on equity to infinity.

In fairness, this past weekend did not see the immediate collapse of a systemically important financial institution or one of the vulnerable elements of the financial sector identified by the Financial Stability Oversight Board. The financial press was relatively quiet ahead of an anticipated move by the European Central Bank (ECB) to make a major injection into the EU economy after the model of quantitative easing that the Fed has promised to unwind in the U.S. Speculation is centered around the risk that either the ECB won't come through as expected or won't be able to execute its plan because of dissention on the part of the Germans and the sheer number of moving parts involved because the measures must be coordinated within the EU.

Therefore, this is not the time to cry wolf in a crowded theater. However, in the middle of all this turmoil and speculation, the world's financial leaders have already assembled in Davos to assess the circumstance. They will be thoroughly interviewed by the press, and those who have been skeptical all along about the ability of the authorities to manage the financial crisis will speak.

Countries whose currency is oil have experienced a major shock. Investors who relied on the Swiss franc to remain low indefinitely are shocked by the cost of servicing mortgages shrewdly and boldly entered into in that currency. Currency speculators, whose plans call for exposure to high leverage are overextended. These developments compound the effects of policies that allow firms that serve derivatives customers to speculate with customer funds. Dodd-Frank exempts these customers from having to post margin on their transactions.

The argument is that it is costly and unfair to require these customers to post margin because they are only "hedging" and not "speculating." Similarly, banks are exempt from the Volcker rule when they are engaged in market making in the service of customers, not trading for their own account. It is all too easy to lose sight of the fact that even hedging transactions entail risk, and transactions denominated as hedges don't always turn out that way.

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Robert-Feinberg
It could be that we have already seen the No. 1 financial story of 2015 — the decision last week by the Swiss National Bank to let the franc float upward, a decision they evidently made without consulting central bankers and finance ministers of other leading countries.
Swiss, franc, currency, financial
548
2015-00-20
Tuesday, 20 Jan 2015 09:00 AM
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