More About Financial Bubbles

But why economic agents do not learn a lesson from history and what is the origin of the observed market euphoria? It should actually wonder more generally about the rationality of agents. By their individual actions, they participate in effect to create a gap between the actual value of a thing and its market value. And this gap increases; more the bursting of the bubble is near, even if the term is unknown. This process can be summarized by the metaphor of the beauty contest Keynes in Chapter 12 of the General Theory. So imagine that you are in a competition against a host of other competitors. You are facing a hundred photos of girls all equally charming as the other, and you are asked to select six, the six prettiest. The person whose choice is closest to the average choice (that is to say the girls who got the most votes) will be the winner of this competition and win the jackpot. Three techniques are available to you and to win. First, you choose a simple, even naive strategy, which is to choose the six most beautiful girls according to your standards of beauty. But you can also adopt a strategy. which is more vicious this time to copy your selection on the other competitors with your expectations. Finally, you say that there is no reason for you to be the one to embrace the second strategy you determine an ultimate, which includes the fact that each competitor will not only formulate expectations about choice other participants, but also on your own. The metaphor of beauty contests and shows that speculation is mainly due to expectations that each agent makes about the behavior of other agents. Worse, it seems rational to participate in this type of competition because there is a real jackpot game now apply this reasoning to any other market (financial, real estate or even tulips) and you now understand that when Prices are disconnected from reality is that economic agents engaged in a competition of beauty contests guy and that large batches are obviously involved other words, do not enter a speculative market generates a cost (opportunity) that corresponds to the potential gain that you would not have achieved; corollary, it is rational to participate in inflating a bubble in order to enrich themselves, knowing that sooner or later the bubble will explode . If the game mirrors expectations promote the creation of speculative bubbles, it should be noted that favorable market conditions may also participate in this movement. Thus, over the last ten years, it is interesting to note that each period of financial euphoria is a situation of low interest rates and abundant liquidity. Thus to extinguish the fire of the Internet bubble of the early naughtier, the Federal Reserve has made successive rate cuts that have led to a rise in private debt and the emergence of a real estate bubble The subprime; Belated. Again, the response of central bankers involved in the reduction rates that, this time, encouraged the public debt; replete. And since it seems that we are now cured syndrome "this time is different" (Reinhart and Rogoff), the current historically low interest rates could facilitate the emergence of a new bubble. What will be the nature of the next big crisis? An early response, rather obvious, is of the bond market, when many experts welcome historically low borrowing rates, especially for states but also for corporate, bond bubble continues to swell to form a time bomb. And if some commentators are trying to alert the markets inevitable future rise in interest rates, the warnings remain almost unnoticed as the general euphoria is great. But other risk factors may also be highlighted. Real overheating in China, seven-fold during the decade gold bubble carbon and financing of energy transition and finally growing attraction for bit coin. Yes, this totally paperless currency created in 2009 by a computer meeting the pseudonym Satoshi Nakamoto, who was at the center of media talks some time ago, due to the sudden surge in its course and all its fall brutal. At its inception, the parity bit coin stood indeed one thousandth of a dollar before reaching on April 10 to a high of 266 dollars, then lose in just a few days over 70% of its value to pass under the below 80 dollars. All bubbles eventually burst and one day or the other. But the man never lacks imagination to always find a new source of enrichment. And when he is not at the origin, it adopts a mimetic behavior that allows him to achieve his goal. This process can really be repeated ad infinitum? Or, maybe it does not itself amount to a giant bubble that would only swell for centuries?

The Financial Bubbles Happened In The Past! -1

What is the common point between the Asian crisis of 1997, the Internet crisis of 2001, the subprime crisis in 2008, the sovereign debt crisis of 2010 and what will be the next financial and economic crisis? They all originate from the bursting of a speculative bubble. This phenomenon of artificial inflation of prices though not new, for more than three centuries actually, economic agents know that trees do not grow to the sky. And yet they are still surprised when a bubble bursts. It all began in the late sixteenth century, when Dutch traders introduced in the country of tulips from Turkey. New, rare and unlikely mix of colors, a combination which gave very quickly tulip flowers to have high value relative to many other flowers that were the kingdom. Tulip and gradually became a luxury item particularly popular with the wealthy but also by the Dutch bourgeoisie. Finally freed from Spanish rule, the latter had indeed reaped significant benefits from trade with Asia, not hesitating to build large houses surrounded by flower gardens particularly with tulips. For almost forty years, the price of tulip flowers then continued to grow at a moderate pace at first, then more sustained from the 1630s rhythm, and in 1635 it took an average of 2,500 florins to buy a tulip flowers,to a greater cost of 25 750 euro( as the value of 2002 ,if we are to believe the calculations of the International Institute of Social History). The price of tulip flowers reached its peak in 1636, the same year; parliament actually discussed a project on the transformation of the nature of the contracts that would become the purchasing options and not obligations which is a windfall for speculators. Thus says at the beginning of year 1637, a tulip flowers could be traded on the futures market against the equivalent of three paintings by Rembrandt, or ten times the annual salary of a skilled craftsman, or against a field of five acres ... data often from pamphlets of the time which it is impossible to verify the accuracy.

One thing is for sure though; the price of tulip flowers was abnormally high. Especially when we know that the color intensity of the flower was actually linked to a mosaic virus of the flower. Finally, in February 1637 that the euphoria ended and the prices of futures fall sharply, marking the end of speculation, understand the "trade wind." The tulip mania and was one of the first bubbles in economic history. It also marked the beginning of a long list of other bubbles - Crash of 1720 following speculation on the South Sea Company, crash of Vienna in 1873 due to soaring property prices in Paris Berlin and Vienna stock market crashes of 1929 and 1987 and, more recently, the subprime crisis - causes and consequences substantially similar. A mass hysteria and the rapid enrichment of people’s misunderstanding one another, movements of brutal impoverishment and bankruptcy.

The need of better integration in environmental criteria in investment!

Banks have become essential in the transition to a greener and more sustainable economy. If their role in financing green infrastructure and renewable energy is identified, their efforts should also focus on the integration of environmental criteria in their funding decisions and investment, primarily in sensitive areas and eventually in all sectors. The 2008 crisis revealed the considerable power to influence of banks on the economy. Respondents even criticized, they undergo a double injunction to continue to finance the economy in all its complexity while being more transparent. Their indirect responsibility is increasingly sought: external stakeholders like customers, shareholders, institutional investors and NGOs), the challenge of repeatedly on the assets they finance and the behavior of large customers they accompany their development. Beyond all controversy, it has become imperative for them to be able to explain their decisions to finance and investment. How can banks now tackle the challenge of meeting the ever increasing global needs while encouraging the development of a production of "sustainable"? To meet this dual standby, banks must gradually integrate Environmental, Social and Governance (ESG) in all funding decisions and investment. The goal is to better understand the potential risks to better identify projects for funding, companies in which to invest, and the most sensitive regions. Their inclusion will progressively as they are both away from the heart of business of the bank (financial risk analysis), long-term and with a low probability of occurrence but maximum impact if realized. The most sensitive to environmental or social terms economic sectors must be supervised by funding policies and responsible investment that apply to all products and services, including asset management. In a little over a year, our group has worked on the areas of palm oil, nuclear, agricultural raw materials essential to the pulp and paper and finally the electricity produced from Coal. These are very heavy projects: each policy requires six months of work on average. All stakeholders are consulted to help position the criteria ambitious enough to have a real impact on the environment and society, but also to ensure realistic level their implementation. Finally, these policies should identify the most critical links in the production chain. Of course, all companies must comply with the existing laws in the field of the environment, but they must also be transparent by providing certain information, to assess the management of their risks on this subject. A thorough analysis of the specific risks of each sector is then used to define performance criteria that companies and / or Projects must meet. These policies approved by the Executive Committee, have been widely disseminated to all trades. If they respond to a pending trade and managers have accurate prior to any decision making instructions, they nevertheless induce profound changes: it is necessary to train and support unfamiliar teams sometimes certain criteria 'very technical evaluation. They also assume a new type of dialogue with customers or companies in whom we want to invest: beyond financial performance criteria, it is now necessary to address much broader issues. Our philosophy is not to exclude a sector as a whole (except those that are subject to legal prohibitions) but we do not forbid, as a last resort, to exclude companies that do not wish evolve and take into account our policies. The approach taken must and will therefore continue in both applying to other sectors, if necessary by revising existing policies (e.g., nuclear policy could evolve following the stress tests carried out in European level) but also in the declining in specific sectors.

European Commission and Taxing policy on financial transactions!

The European Commission and the European Parliament are to authorize the implementation of an enhanced cooperation procedure between 11 Member States to implement a tax on financial transactions. The contours of the project are summarized below.

 EFSM: European Financial Stability Mechanism, EFSF: European Financial Stability Facility, Financial institutions: credit institutions, investment firms, organized markets, insurance companies, asset management companies, pension funds, holding companies, leasing, securitization vehicles. The expected charges is 0.1% for cash instruments and 0.01% for derivatives. The scope includes the "financial markets" broadly, carefully avoiding the financing of the real economy through the exclusion of the primary market and financial products distributed by the retail banking and insurance. However, the purchase and sale of securities by an individual investor will be taxed via the taxation of the financial intermediary through which this negotiation channeled. The project raises vehement reactions from the world of finance. European banks have made their estimates, which showed that the FTT will sign their death warrant. The French associations instead, sent the Minister of economy to measure on the fate of individual financial institutions, but very they are very alarmed about the impact of the tax on the financing of the economy. It is difficult to sort through the flood of objections that can be read at this time. I chose to retain both. The tax applies to the negotiation and not the transfer of ownership. It is true that the presence of intermediaries and clearing induces a succession of transfers of ownership in the post-market cycle.

But such transfers resulted in two orders (purchase and sale) that resulted in an execution. The purchase and sale will be taxed ... 2 times as expected. However, it will not be the same if the negotiation goes through the OTC market, involving broker-dealers who buy the securities for their own account before transferring to their clients. This leads to the second point. The European Commission assumes that the FTT will effectively eliminate altogether certain market activities. This is what emerges from the published 02/14/2013 impact study. Effect on the market for public debt as the primary market is not taxed investments "buy and hold" long-term types will be favored. The implication speculation on debt of countries in the Euro zone, it's over. Effect on the repo market: The overnight repo will be replaced by secured loans (non-taxable). Therefore also exit the repo, considered a particularly opaque part of the "shadow banking" and carrying systemic risk by successive transfers of collateral. Impact on the OTC derivatives market: there too, the Commission expects a significant drop in volumes, without being moved more than that. Effect on market makers, systematic and other proprietary traders internationals: taxation of transactions of all these intermediaries will lead to cascading effects.

These are fully paid and their consequence capture spreads, become unprofitable cease altogether. Finally, one may wonder if there is not in this project a public agenda and calendar, otherwise hidden, the less "discreet." The public agenda was a political component: meet the largely hostile public opinion in the world of finance, and tax issues: generating additional revenue that would help significantly reduce the contribution of the participating States to the EU budget. The hidden agenda is, if not eradication, at least in the drastic limitation of certain activities deemed unnecessary or predatory for the real economy. It is obvious that the realization of this hidden agenda will also have the effect of reducing tax revenues, but this effect appears here, too, assumed perfectly.

European Commission and Audit Reform

Force companies to change auditors periodically and prohibit auditors from providing other services are part of changes to draft legislation to open the market for audit services in the EU and to increase the quality and transparency adopted in Committee on Legal Affairs on 25 April 2013. The role of auditors has been questioned because of the financial crisis. "We need to regain the confidence of investors, who want quality audits and independent give them the assurances they need when investing in European companies," said Sajjad Karim (ECR, UK), in charge on the reform of the audit. The committee decided by 15 votes for and 10 votes against to open negotiations with the Council in order to reach a common text. The S & D, Greens / EFA and GUE / NGL voted against. Informal negotiations begin as soon as possible. The legislation would force auditors in the EU to publish audit in accordance with international standards reports.

For auditors of public interest entities, such as banks, insurance companies and listed companies, the committee agreed that audit firms should provide stakeholders and investors a comprehensive document containing all actions of the listener and providing a comprehensive manner, the accuracy of the accounts of the company. As part of a series of measures to open the market and to increase transparency, the committee voted in favor of the proposal to ban contractual clauses "only four major companies" that require the audit is performed by one of them. The public interest entities would be forced to launch a tender in the selection of a new auditor. To ensure that the relationship between the auditor and the audited company become too familiar, MEPs adopted a mandatory rotation rule that an auditor would have the right to audit the accounts of a company for 14 years maximum, a period that could be extended to 25 years if guarantees are provided.

The European Commission had proposed a period of six years, but a majority of MPs in the committee felt that it was an expensive and undesirable intervention in the audit market. To avoid conflicts of interest and threats to their independence, EU audit firms would be forced to comply with rules similar to the standards internationally. Most members of the committee considered the proposal for a general ban on the provision of other services, counterproductive to the quality of audits. They agreed that the only other services that could threaten the independence should be banned. They also approved a list of services that would be prohibited under the new legislation. Audit firms could, for example, continue to provide certifications regarding compliance with tax requirements but would no longer provide tax advisory services that directly affect the financial statements of the company. They could also be examined by the national tax authorities.