However, much of the content of the conference was dominated by the role of markets and the financial crisis. Many of the speakers had the financial pitfalls in mind when they spoke about the problems being faced by poorer members of society. (For a definition, please click here – social exclusion .)

There was one speaker though, Josep Borrell, that addressed the issue much more concretely. Mr Borrell is former President of the European Parliament, so I think it is safe to presume he has some knowledge and insight to be applied.

He described the influence of the markets and how they are able to dictate policy to governments – albeit indirectly. This power to influence, by devaluing a currency when the financial policies of a government are not liked, is something that he called the “negation of democracy”.

He also highlighted the terrible inconsistency of large financial organisations and their market behaviour. The ability to punish governments in the financial markets by selling currencies down, having just needed a bailout, and using the bailout money to do it, shows the problems we have with markets currently.

If you would like to hear more, get it from the man himself. I asked him to elaborate:

As mentioned here, David Wright, Deputy Director of DG Internal Market and Services, is one of the most public voices right now on the direction the the EU is heading in. When it comes to hedge funds, capital requirements, OTC derivative reform, regulatory arbitrage and more, he is the person to listen to.

The interview is separated into two parts. In the first, Mr Wright discusses many of the elements of finance that need to be reformed.

In part 2, I ask about the prospects for increasing transparency and the influence of regulators in financial transactions…

The subject of ‘regulatory arbitrage’ and it’s implications was one of the key themes at Deutsche Bank’s event on 4th May about OTC derivatives in Brussels.

An overriding fear for legislators is that should the new rules be much delayed, on either side of the Atlantic, it will provide an opportunity for financiers to move their operations or trades to the location with the weakest rules. Even if this only happens for a temporary period, it may add further systemic weaknesses to an already weak global financial system.

Dr Swinburne was keen to point out that while the level of understanding in these complex financial instuments was growing rapidly in the CRIS Committee and that much progress had been made, it was still too early to tell what direction their policies would take. She warned participants that second guessing the outcome was pointless at this stage.

Emil Paulis, Director of Financial Services Policy and Financial Markets for DG Internal Market and Services at the European Commission, explained his expectation of the path ahead. Regulating OTC derivatives is clearly a feasomely complex area and since this regulation must start from virtually the ground up, many steps will attempt to bring these contracts in line with other asset classes.

These steps have three main themes. These are:

Counterparty Risk to include the use of the Capital Requirments Directive to help assess counterparty risks and pricing, for central clearing houses to oversee or authorise transactions.

Transparency so that as much information as is possible is available to let regulators and clients see the full terms of contracts. Questions were obviously raised about the competitive nature of these markets and the implications to business models of full disclosure and the usefulness of publishing contracts that are so complex that only those involved will fully understand them.

Increased standards of Market Integrity and the prevention of market abuse. It is likely that corporations using derivatives to hedge the risks in their business will receive exemptions, but for financial firms, the rules currently in place for other asset classes should be applied.

As a part of these measures, a – very – short public consultation process is planned. With the first releases due before the summer break, the revision of market abuse rules planned for the fourth quarter of 2010, and the problems of trying to match rules and progress with the United States, the OTC arena is due for fast and important changes.

According to the story, it seems that confidence in Wall Street is ‘on the line’. Which line would that be?

Perhaps it is the final line that an economy will not cross after being corrupted by personal and corporate greed, it has blown up it’s own residential property market, financial services and investment banking industries, borrowed trillions that it can never repay to the rest of the world, failed to regulate and govern and done it’s best to export this ‘business, economic and political model’ to the rest of the world!

Whew! Thank goodness there is a line after all…

When considering words like Enron, Madoff, WorldCom, Andersen, ratings agencies, NINJA loans, Bear Stearns, LTCM, Amaranth, financial crisis, bail out, unfunded liabilities, dollar weakness and many many more that your author cannot be bothered to list, there remains just two questions of interest:

1) Is there anywhere left in the world other than Wall Street where confidence remains in Wall Street?

2) How much of your pension fund, college fund for your kids education or investments in general that you own, are responsible for and can control, do you still have invested in the US dollar or United States?

I bet that feels like too much right now…

Well the story explains a little of the real numbers. As we must all have – at a minimum – suspected by now, governments have a habit of reporting nmumbers in the best possible light. With inflation we have RPI, RPIX, ‘Core’ rates and more. Over time, the subtle changes in methods of calculations make these numbers meaningless to most of us. This post by Greg Hunter suggests that US inflation – if calculated using the same method as in 1980, it wouldn’t be 2.7% but 9.7%.

Well it is the same with US jobless numbers. As you will see from the story, and from Greg Hunter’s post, the real number is likely to be much higher. The BBC thinks more like 17%, while Hunter (via shadowstats.com) thinks 21.9%.

(It is worth pointing out that while some statistics may change in the level of their importance, when they were first invented, it was with a reason. That reason was to measure something. It seems reasonable to presume that they were invented to measure that thing as accurately as possible. Therefore, most changes probably reduce the ability of the numbers to measure accurately. So when something is compared to the (for example) 1980 method, that method is probably a much purer reflection of the underlying number. End of rant.)

It is numbers like this that will ensure that public sector debt is stubbornly difficult to reduce and that this will be a very long recession.

There are two factors that make such statistics really meaningful. Firstly, we all know just how important the US economy is to the global economy. The longer and deeper this recession lasts for America, the longer and deeper it will be for all of us. This will not be easy to shift.

Secondly, there are many developed nations that ‘massage’ their economic statistics like this. If I happened to speak several languages and read several different nations major newspapers each day, I could probably quote similar situations in many European nations. But I don’t so I can’t. But there have certainly been changes to the way numbers are calculated in the UK.

How we – and I include government – are meant to deal with the debts of the world and this economic crisis if we don’t really understand how bad the problem is, I have no idea. Confronting the problem is the first step in dealing with it. But still, around 2 years in, we are unable to see the real numbers. It seems that we are still hiding behind lies and statistics.

Why?

Dubai.

All this time, we have been witnessing the economic miracle that is / was Dubai in awe and respect. But hey, it seems that they have built their massive towers not on sand but on debt! Sand might be unsafe, but debts are worse. And we thought they were all bazillionaires in the UAE…

Earlier in the year, we learnt about the end of the Dubai property boom as prices plummeted. Various stories are becoming ‘legend’ about expats leaving their Mercedes at the airport as they fly out to avoid their debts. Now we find that the Dubai government is in serious hock and pulling global stock markets down.

Will the sheiks be leaving their Maseratis at the private runway when they leave? That’ll be the place to go car hunting.

With so many banking stocks already in trouble – even after positive recent results – there seems to be no visible route for a genuine recovery in the financial sector. One thing that seems ever more clear, if major banks have been proved wrong about lending to Dubai – the home of global extravagance it would seem – then it is easy to imagine that there are many more loans in deep trouble.

It certainly proves the ability of the financial services and banking industries to spray money around. From NINJA loans in the USA to sovereign governments in the Middle East, they were certainly equal opportunity lenders.

What never ceases to amaze me, is the level of debts that seemingly wealthy individuals, corporations and nations have. Is there anyone or anything left in this world that isn’t up to his / her / their necks in debt? Would that man, woman or organisation please stand up? (‘Cos the rest of us need a loan…)

When you read about countries like Dubai and Latvia struggling or going under ( Puerto Rico went bankrupt earlier in the year ), it doesn’t need a big stretch of the imagination to forsee bigger nations next.

This isn’t a domino effect for nothing you know…

For sure, it will take time before a genuinely large government goes under. Perhaps I should start a ‘debt pool’ in a similar vain to Dirty Harry in The Dead Pool to see who can pick a ‘winner’. Of course, finding a politician willing to fall on his or her sword over their handling of the recession / depression / financial crisis really is the needle in the haystack.

He is probably right.

Much of the blame for the stock market drop in 1987 lies at the door of automated trading programs. At the time, they were en vogue on Wall Street amongst fund management companies. As the markets started to fall, the automated sell orders started to kick in simultaneously. The effect was to take the market – Wall Street suffered the most – into a nosedive that was only stopped when the market was closed.

Steps were taken to remove some of the automated nature of these orders to – hopefully – prevent such an event happening a second time. A couple of generations of traders later, and it appears that the technology is making a big comeback.

One question ought to be answered though…

Since when has the market not been under the influence of major players and speculators? Ever?

This is an important question, the super-rich seem to control such a large portion of the world’s assets (often highly leveraged via the use of borrowing and hedge funds) that they must account for a substantial portion of global investment.

As can be witnessed by following the news related to the English Premier League (football / soccer), a location awash with billionaires, they suffer financial problems as well. Theirs are simply on a much larger scale than the rest of us.

You know the thing, you borrow a lot of money, lend it out globally, become a banking titan and then the credit markets change and you bankrupt Iceland. It is all just a simple misunderstanding, an accident if you will. We have all had similar problems, don’t tell me you haven’t

So which is better, trading by algorithm or oligarchs and billionaires? Talk about a rock and a hard place!

What must have become evident over the last 18 months is that the operation and regulation of trading and financial markets is too important to not take very seriously.

a) interested in finance

b) wondering what the real cost of the bailouts are

or,

c) from the UK

be sure to spend 30 seconds of your day taking a look. See the slides here.

For months, the British public have had to listen to Prime Minister Brown and Chancellor Darling on the news explaining how ‘robust’ the UK economy is and how ‘well placed’ it was to handle the credit crunch.

It now seems that it was ‘robust’ enough to be saddled with massive amounts of debt and ‘well placed’ enough to require them to borrow nearly 95% of GDP!! Imagine what might have happened if the UK economy was in a ‘poor’ position!!

Personally, I don’t believe a word of it, but if you do, then you can at least now have the pleasure of realising that the UK economy is heading for something akin to collapse. Any government taking on borrowing like this is either heading for default on it’s public sector borrowing or crippling inflation. Or perhaps both.

Either situation would likely be a disaster for private investors, those holding units in funds in bonds or stocks and much else besides. Certainly those with fixed incomes would be in a very difficult position…

Poor Lithuania…

This story explains that the Lithuanian economy has falled by a thumping 22.4% in the second quarter. And we all thought that the 17% drop in activity in Latvia was huge!

If this isn’t an alert for the IMF that more funds will soon be required, I don’t know what is.

The real problem is that under such conditions, how do you tell what will help to end this slump? We all know that economic problems in one country can easily spread across the border since neighbouring nations are generally significant trading partners. This is one reason why South Africa has been so loathe to interfere in Zimbabwe for so long – the fear that the economic disaster could be transferred.

With Latvia and Lithuania in such economic retreat, we are left to fear that Poland will be pulled much lower. Let us hope not.

This time last week I was fortunate enough to attend a one hour lecture by Felipe Gonzalez, former 4 time Prime Minister of Spain. The event was organised by The Lisbon Council in Brussels.

I have to say that Gonzalez was both a fascinating speaker and very difficult to follow. Looking back at my notes, I have made some incredibly insightful observations. At the time, they didn’t seem to be particularly insightful – and of course, they were not my observations…

In the main, he spoke about the financial crisis and the impact that it is having. His speech – or at least my notes of it – relate to competitiveness, the impact on the social model of Europe and solutions to the crisis.

I shall try to make the notes into a legible form here – please accept my apologies if I fail…

Mr Gonzalez feels that before the financial crisis Europe was losing ground in terms of global competitiveness. We Europeans cannot compete on labour costs with much of the world and it is questionable whether we add enough value or technical improvements to justify the higher wages. This lack of global competitiveness is risking the European social model.

This loss has created what he called “sweet decadence” within the EU. The EU has been losing relevance on the global stage and this reduces the impact it can have in decision making processes. This is a structural problem.

He believes that most governments are not actually responsible for the financial crisis, though they were mostly complicit in some small way individually. But now that the credit crunch is here and recession is biting, they are unable to react well at either a local or national level. Without cohesion, he believes that it will not be possible to fix global markets.

He also feels that sooner or later we will need to bail out individual nations. If this is likely to happen, why postpone it? Delaying such decisions will likely cost more in than the future than now – so why aren’t we fixing them now?

He used the word ‘gargantuan’ (or at least his interpreter did) on a number of occasions when talking about the scale of public debt. You don’t normally hear politicians use such strong language as that – even politicians no longer in office.

All in all, it was interesting. He is clearly a very intelligent and thoughtful man.