Speaking at a conference held in Dubai, recently, Zed Ayesh, Managing Director, Flagship Consultancy, said insecurity persists because the current global financial system is based on the predictability of consumer behavior patterns.
“Modernization and globalization brought the world closer together more than ever before, allowing easier global capital flows and offering opportunities for investment gurus, bankers and other financial master minds to compete to attract such wealth to create more profits for themselves by offering high returns on new capital. The higher the returns the more capital (investment) you attract, the more capital the bankers have the bigger promises they can make, sell and trade,” said Zed Ayesh.
“The funny thing is that those bankers take real money and give the investor a promise with interest on that promise, the investor in his turn takes that promise and uses it to make more promises for loans that he uses to buy more promises. So more promises can be bought and sold on the basis of higher interest,” added Ayesh.
Financial institutions make their profit from employing the money of others and then charging higher than their cost to manage the money. Over time bankers have figured out that in normal market conditions the (cash) needed to keep things floating is around 10% from money deposited in the bank (demand accounts); financial institutions then borrow cash from one another through the central banks overnight, to cover any (cash) shortage they may have incurred – this is done at an interest rate called repo. As a last resort, central banks themselves charge interest known as a central funds rate.
Banks hold promise notes (repayment agreements) from borrowers to repay the borrowed money back to the bank at a given interest rate. Banks can then take such promise notes and borrow money from other financial institutions against such promise notes at lower interest rates and re-lend that money.
From this they can obtain further promise notes and borrow more money against it, and lend more money and make more profits; this is known as money circulations.
From the actual borrower to the holder of the last promise note, many interlinked chains of financial institutions will be involved in the process at different levels of involvements; and globalization will add more complex integration to the entities involved in such chains.
Over time the money circulations got bigger and bigger as it’s easy for financial institutions to create more money through promise notes and bundling those promise notes in such a way that no one can understand.
With the emergence of a new breed of bankers and investment gurus that get paid millions of Dollars by making more promises, trading more promises and even betting on which promises will be paid or not. Even some more creative bankers bundled the bets on promises (known as Derivatives) and sold those bundles as investment tools and/or insurance (hedge) funds.
Ayesh added, “This is the global financial system in simple terms and the collapse of this system is simple: sooner or later those promises will be due for payment (maturity) and some will have to pay for them, so when the time comes, and a significant amount of promises cannot be paid simultaneously, this will cause the financial chain to break.”
The true crisis is a trust crisis, not a financial one as the entire system is built on turning intangible investments (promises) into tangibles (money supplies).
Ayesh concluded, “Even with the help of all governments and central banks across the globe, the current financial system will continue to struggle. Every few years a financial crisis will hit this system. Further study is critical in order to identify, understand and separate the winners and the losers in the current financial system upturns and downturns.”
Tuesday, February 24- 2009 @ 16:57 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.