There are two future thinking filters through which I view the recent upheavals in the financial markets. The first is that we are moving to a new and developing global society and that this can first be seen economically. The second is that debt is something that must be looked with new perspective. Today we look at the first filter.
Humanity has conclusively moved into the global stage of its evolution. There is no turning back. There are more than six billion of us and that fact alone is enough to reorganize human endeavor to a global orientation. Human history shows us that economics usually leads the way with politics and culture following close behind. Columbus â€˜discoveredâ€™ America because he was looking for a trade route to India (at least now we refer to our indigenous people as Native Americans, no longer Indians) for the economic gain of Europe. American politics and culture ultimately followed this initial economically driven endeavor.
BNP Paribas, the largest publicly traded bank in France suspended investorsâ€™ ability to withdraw money from funds that had invested in American mortgage securities. When one of the largest financial institutions in Europe shuts down trading because of rising foreclosures in California it is clear that the financial marketplace is global. Of course we have known this for years, particularly since the advent of electronic fund transfers. Money flows electronically around the world without any regard to borders or time zones. Now that money has lost much of itsâ€™ physical characteristics, it is much more mutable and moves freely and quickly from investment vehicle or financial institution to another, literally at the speed of light due to fiber optics.
In two of the earliest columns published here â€” one of which I just reposted â€” I argued that the Fed, and itsâ€™ chairman could no longer look at the U.S. as a stand alone financial marketplace where pulling this lever, and pushing that button could predictably make the economic adjustments desired. The global economic marketplace has become way too connected and interrelated to continue with that thinking. A panic in one country affects the stock market in another country. Thousands of first time home buyers walking away from houses that they purchased with exotic sub-prime mortgages in the suburban valleys of California brings paralysis and illiquidity to a trading desk in Paris.
We are now seeing a new level of market conditions that have not existed before due to this global economic reality. Hedge funds can move money so quickly electronically across multiple markets that they have disconnected from past behavior. The U.S. stock markets are experiencing volatility due in part to this factor. These hedge funds have quantitative computer trading programs based upon incredibly extensive historical data. The funds have been unable to liquidate their holdings in mortgage backed securities so they have had to raise cash by selling equities in the liquid stock markets. The numbers are so large that they then trigger the computer buy/sell programs. Since these are somewhat similar from fund to fund, there are huge amounts of simultaneous transactions which quickly drive markets up or down in minutes. Everyone is scrambling to keep abreast of the current crisis using tools based upon now outdated historical data.
Metaphysicians and Eastern spiritual leaders have long spoken about how everything is one, how all is interconnected. They speak of how an occurrence in one part of the world causes a reaction in another part of the world, that everything is an interconnected web. This view has no room for such things as national or political boundaries. Well, if a first time home owner in a valley in California makes the tough decision to walk away from their home and their mortgage and that decision affects a debt trader in Paris, is it not the same vision?
The weaving together of the new and emerging global financial market is dynamic and on-going. I sense that we will look back to this time in the financial markets as a turning point or a generally recognized sign post pointing us down the road of an ever increasingly integrated global human society.