Porco has been thinking about the present financial crisis – some have blamed it on greed, others on ignorance. Porco thinks of it in terms of physics and metaphysics, plus a bit of relativity and even a little religion.
Let’s start with speed. Speed is the distance travelled over a given amount of time. The Basel Capital Accord is more than twenty years old – and a lot has happened in that twenty years in the financial markets. The central banks simply got left behind. It was a clever idea to divide assets into three – the good, the bad and the uglyPorco remembers addressing a meeting in 2001 with representatives from the G7 central banks and discussing CDO default models with them. Nothing has happened since then.
The problem with speed is that it is also another name for velocity and that multiplied by mass gives momentum. Given enough momentum, anything – derivatives, financial instruments or space shuttles – can defy the laws of gravity or free itself from anything holding it back, even the rules of financial regulation, and launch into an orbit of indeterminate shape or duration. We are venturing into territory where no financial regulator has ever been, boldly or otherwise. Sometimes, that which has launched itself into space could come crashing back to earth, burning up upon re-entry.
Now Porco is no longer religious as he was in his youth but he is reminded about the bit in Revelation where the seven angels are given trumpets and then another angel joins them – so there were eight. The angels blow their trumpets and by the time the fifth angel sounds its trumpet, a star falls to earth and to him is given the key to the bottomless pit. Then the locusts arrive.
