MBASess8BTwinCrises09
Transcript of MBASess8BTwinCrises09
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MBA Global Economy
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The Twin Global Crises: How To cope?
Presented by
Professor Augustine H H Tan
Note: All views expressed are personal and do not necessarily reflect those ofSingapore Management University
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2008: Annus Horribilis
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From Inflation to Recession
Depression?
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Its Global!
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Financial Crisis: housing, banking and stocks
Main Street: All engines stallingRescue: Monetary easingRescue: Bailouts
Rescue: Fiscal StimulusExposed: soft underbellies
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Worst Since Great Depression
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Recession or Depression: How Much To Fall?
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Asset Deflation: More To Come?
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IMF Forecasts
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9Recovery: V-shaped, U-shaped, L-shaped..?
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IMF Forecasts
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Session 8Brofessor Augustine H H Tan, Global Economy
11Deglobalization?
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IMF Forecasts
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IMF Forecasts
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IMF Forecasts
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Coupled
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Decoupled?
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Or,Derailed?
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18Japan Down
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Japan: End of Surplus
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Jan09: Exports dropped 46.3%
Current Account: - Y172.8bill[S$2.7bill]
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China Slowing.
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China Derailed?
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Emerging Countries: Still Afloat?
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Export Dependence
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Crisis Agenda
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Deregulation & Supervisory Failure
Repeal of Glass-Steagall ActAsset Market mismanagementDerivatives & underpricing of risk
Excessive leverageGlobal ImbalanceBailouts, Moral Hazard, Increased public sector debt
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Unregulated Greenspan
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Irrational Exuberance
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Deregulation!
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Reagan, Thatcher
Greenspan confessionDid not understand financial derivativesOverestimated self-discipline of markets
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Repeal of Glass -Steagall Act
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The Glass-Steagall Act of 1933 established the
Federal Deposit Insurance Corporation (FDIC) in theUnited States and included banking reforms, someof which were designed to control speculationProvisions that prohibit a bank holding companyfrom owning other financial companies wererepealed on November 12, 1999, by the Gramm-Leach-Bliley Act,
Banks could get into investment banking directly orvia SIVs [structured investment vehicles] to engagein risky and leveraged instruments
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Origin: Subprime
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CDOs
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Asset Markets
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Bubbles
Central banks have not been able to identify bubblesuntil too lateCentral banks create financial tsunamis: excessivecredit easing followed by excessive tighteningHome ownership imperative: relaxing prudentiallending ninja loansFailure of financial market supervision: excessive
leverage
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Asset Bubbles
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The Lemming Behaviour
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Global Lemmings
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$65 Trillion Debt Insurance
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Credit Default Swaps
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JP Morgan
CDS: conceived as brilliant idea to remove defaultrisks of loans by banks via insuranceEnabled banks to lend even moreProblem: correlation of default risks, e.g. LehmanBros.AIG given a US$85 billion bailout
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Dubious Derivatives
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1994: Deriviatives on Wall Street"Wall Street's new products are so complicated andinterdependent that only the advanced numbercrunching of the quants can untangle the risks involved;without it, the market crushes you. The result is thattechies in large numbers -- engineers who lost jobs atthe superconducting supercollider, doctoral studentsbored with their computer-science dissertations -- areheading for Wall Street. Wall Street as the real world is aconcept that could raise eyebrows. But some financialexperts wonder whether the quants are weakeningwhatever contact with reality the street may have had."From: Attack of the Data Miners, Apr. 11, 1994
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Bundling, Slicing & Dicing
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Under-pricing of risksFinance courses do not teach macro-economics: howfinancial tsunamis can swamp risk modelsCreation of products that nobody understandsNobody can track potential movements of derivatives
Wealth managers require investors to trust theirjudgment and the reputation of their institutionsWealth management is incentivised to foist dubiousderivatives on unsuspecting customers
It is not only the elderly and the uneducated that shouldbe reimbursedall who do not understand derivativesshould be compensated. That includes everybody!
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X-ratings
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Power of RatingsAgencies
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Who conferred power on Ratings agencies?
Has any of them been penalized for collecting feesfor the transformation of sub-prime and other junkbonds into AAA instruments?
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Sinking CDOs
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Dried Up
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Global Financial Integration
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Touted as having brought about lower costs offinancial and greater economic efficiencyFDI not the problem in causing financial turmoilShort-term capital movements lead to speculativeexcess and heightened risks:
Currency mismatchMaturity mismatchExcessive leverage: Yen carry trade
Currency crises
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Excessive Leverage
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Households: student loans, car loans, mortgage,renovation loans, credit card loans, financing ofstocks and shares, overdrafts, extracting housingequity to splurge and to invest, with furtherleveraging
Corporations: multiple loans from many banksFinancial firms: leverage of 30 times or more![Lehman Bros]
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Investment Banking = X-Risk & X-Leverage!
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The Bigger, The Greater The Fall
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UK Banks: Bottomless Pit?
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Bank Losses
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The raging debate about the largest American banksis whether their stock market values should be zero.Economist Nouriel Roubini, the most highly paidpessimist in the world, recently said that U.S. banksare "insolvent" and credit crisis write-downs will
total $3.6 trillion. That is a great deal more than hasbeen taken as losses by financial firms to date.
--Time, 21 Jan 2009
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A Time to Swindle
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Charles Kindleberger, Manias, Panics & CrashesCommercial and financial crises are intimatelybound up with transactions that overstep theconfines of law and morality, shadowy thoughthose confines be.The propensities to swindle and be swindled runparallel to the propensity to speculate during aboomCrash and panicinduce still more to cheat inorder to save themselves..the signal for panic is often the revelation ofsome swindle, theft, embezzlement, or fraud
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The Ultimate Ponzi?
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US Household Debt
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Consumer Panic
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Consumer Retreat
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Wealth from houses and stocks fell > US$10 trillion
Consumer spending likely to fall by US$400billionCollapse of housing starts: construction fall byUS$200 billUS$600 bill = 3% GDPFurther asset deflation likely
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US N f d l D b
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US Non-federal Debt
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US M d T Th Hil !
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US Mortgaged To The Hilt!
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US B il t
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US Bailout
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US B dg t D fi it
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US Budget Deficit
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Stim l s B rden
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Stimulus Burden
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US Federal Government Debt
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8 March 09: $11 trillion [$36,000 per capita]$3 trillion owed to foreigners, mostly central banksEnd of 2009: estimated public debt/GDP = 70%
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Tide of Red Ink
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Stimulus Program: Will It Work?
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Strong Obama leadershipStimulus package = 2% GDPProjected job creation = 3 million1/3 comprise tax cuts: much will be saved becauseof household debts, unemployment, falling assetprices stimulus package: offsets contractionary
cutbacks of states [California alone: $40 billion]Failure to revive banking system
Moral Hazard
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Moral Hazard
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Too big to fail: should banks be allowed to growhuge like Citigroup, once touted as the paragon ofmodern banking? Singapore should take note!Buying of toxic assets from financial institutions willcreate moral hazard
Swedish model: re-capitalize banks by taking equityshares [in effect nationalizing them]. This will allowrecovery of public money
Over regulation?
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Over-regulation?
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Central banks may move to:1. Disallow banks to engage in investment banking2. Regulate issuance of derivative products3. Limit leverage by financial firms4. Regulate insurance of debt5. Learn to manage asset markets better6. Coordinate globally to oversee cross-border short-
term financial movements
Re regulation?
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Re-regulation?
Monetary Policy
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Monetary Policy
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Lowering interest ratesOpen market operationsLender of the only resortDamaged financial system:
Liquidity trap: lenders do not lend, borrowerscannot borrow
Excess Inventories & Capacity
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Excess Inventories & Capacity
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HousingFactoriesFinancial services:
US: from 6% of GDP to?UK: from 16% of GDP To?Singapore: from 16% of DGP to?
Global Imbalance
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Global Imbalance
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Lopsided.
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Lopsided.
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Can Asians Consume Enough .
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Can Asians Consume Enough .
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To offset the decline in Americanconsumption?
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Engine Failure
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g
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Adequate Reserves?
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q
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Can Asian Consumption Increase?
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p
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Sovereign Wealth Funds
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To the rescue?Political implications?Dented by the crisis?How much impact?
Protectionism
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Buy AmericanBailouts of producers = subsidy. Domesticproduction, e.g. of American automobiles increaseat the expense of imports.Find fault with foreign products: China bashing over
toys, melamine in milkFire foreigners firstCompetitive devaluation
Singapore Budget 09
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g p g
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Grim scenarioResilience package
GDP: Heading Down
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4 th Q 08: -3.7%, y-year4 th Q 08: -16.5% seasonally adjusted, annualised q-quarterYear 2008: +1.2% [from 7.7% in 2007]Year 2009: GDP growth official forecast = -5 to -2%Inflation 09: -1 to 0%Deepest recession since independenceRecovery highly dependent on global recoverynotexpected until 2010 at best
Resilience Package
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$20.5 billionbiggest everJobs: $5.1 billBank loans [SRI]: $5.8 billTax reliefs and grants for businesses: $2.6 billFamily income support: $2.6 billInfrastructure, education and health: $4.4 bill
Overall budget balance: -$8.7 bill [3.5% of GDP]
Singapore Budget 09
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First drawdown of reservesInnovation: keep companies afloatFinancial BypassImproving infrastructureRe-training: positioning for global recoveryRe-thinking: are we competitive?Re-thinking: can we avoid another Iceland?
Singapore Banks
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Well capitalizedNot burdened with toxic loansNPLs = 1%However, lending has declined:
Foreign banks affected by HQLocal banks turn more cautious
Financial Exposure
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Year 2007 $ Billions % of Reserves % of GDPTotal Assets ofCommercialBanks
580.9 248 254
Total ACU 907.4 387 396
Total Non-bankCustomerDeposits
315.0 81 80
GDP at marketprices
229.0
Official Reserves 234.5Economic Survey of Singapore 2007
Financial Exposure
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Type $Billions %
Total Assets 580.9
Banks & ACU 192.9 33.2
Securities & Equities 91.9 15.8Non-bank Loans 233.4 40.2
Others 51.4 51.4
Total Assets of Singapore Commercial Banks
Economic Survey of Singapore 2007
Financial Exposure
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Type $ Billions %Total 233.4
Building & Construction 37.5 16.1
Housing Loans 73.1 31.3
Financial Institutions 31.4 13.5
Professional & PrivateIndiv
35 15.0
Commercial Bank Loans To Non-Banks
Economic Survey of Singapore 2007
Iceland Meltdown
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Iceland..
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Population: 320,000Per capita income: US$39,400Aspired to be a financial centerBank Assets > 8 x GDPBanks carried massive debts and became early
victims of the global credit crunchGovernment fellKrona plunged 30% against Euro in 10 daysOct 08: IMF bailout of US$10 billion2009: GDP will decrease by 9%, inflation by 13% andunemployment will be 7.8%
Icelands Krona Sunk
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Icelandic Banks: Top Heavy
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Lash to Supertanker?
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Need for New Markets?
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Singapore Exports: Semi-Manufactures
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Singapore Exports: Semi-Manufactures
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We are vulnerable: emerging countries like Chinaand India can also produce them
Not positioned to take advantage of rising consumerdemand in China & IndiaWhere are the Singapore consumer brands?
Exporting know-how in building ports, airports,industrial estates, hdb-type homes, medical centers:will such create enough jobs in Singapore?
R&D94
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INSEAD: Singapore is the most innovative Asianeconomy and ranks 5 th in its Global Innovation Index
Minister TharmanWe rate well in our legal and regulatoryframework relating to intellectual property & ICT,
and ease of doing business. But we have a lot todo in other respects, especially in securingcompetitiveness through unique and innovativeproducts among our enterprises.
R&D: Budget Provisions95
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[last budget]: substantially enhanced tax incentivesfor innovation & R&D
$130 mill: grants & training schemes to encourageenterprises to refresh and develop new capabilities$200 mill: test-bedding of new ideas in urbanplanning, traffic management, water management,lifestyle products & services.$180 mill: to Core Innovation Fund which helpsprivate companies collaborate with governmentagencies to develop innovative solutions for publicservices$400 mill: added to National Research Fund
National Research Fund Strategy96
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National Research Fund Strategy.97
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Question:1. Are we doing enough in more practical R&D usable
in SMEs?2. Target: to provide a total of 86,000 jobs with value
added of S$30 billion by 2015. What has been
achieved so far?
James Tobin, 198498
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I [suspect] we are throwing more and more of ourresources, including the cream of our youth, into
financial activities remote from the production of goodsand services, into activities that generate high privaterewards disproportionate to their social productivity. Isuspect that the immense power of the computer is
being harnessed to this paper economy, not to do thesame transactions more economically but to balloon thequantity and variety of financial exchangesI fear that,as Keynes saw even in his day, the advantages of theliquidity and negotiability of financial instruments comeat the cost of facilitating nth-degree speculation which isshort-sighted and inefficient.