Asia's savers not the culprit

Commentary and weekly watch by Doug Noland

"The extraordinary risk-management discipline that developed out of the writings of the University of Chicago's Harry Markowitz in the 1950s produced insights that won several Nobel prizes in economics. It was widely embraced not only by academia but also by a large majority of financial professionals and global regulators. But in August 2007, the risk-management structure cracked. All the sophisticated mathematics and computer wizardry essentially rested on one central premise: that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms' capital and risk positions." Alan Greenspan, March 27, 2009, Financial Times

Former US Federal Reserve chairman Greenspan remains the master of cleverly obfuscating key facets of some of the most critical analysis of our time. The fact is that "the sophisticated mathematics and computer wizardry" fundamental to contemporary derivatives and risk management essentially rested on one central premise: that the Federal Reserve (and, more generally speaking, global policymakers) was there to backstop marketplace liquidity in the event of market tumult.