Could someone with some economics savvy translate this into English; does this represent a hazard to generalized bank solvency and all our garden-variety savings and checking accounts?
and your garden variety accounts ought to be insured by fdic.
“Could someone with some economics savvy translate this into English; does this represent a hazard to generalized bank solvency and all our garden-variety savings and checking accounts?”
If this were an easy question, economists, accountants, and lawyers wouldn’t earn such big paychecks. :-) But yes, there is a bottom-line hazard; how great it is, and how it will play out, yet remains to be seen.
The twin dangers are an intricately interlocked global financial system coupled with accounting rules that allow corporations to play ‘hide the penny’ in Enronesque ways. “Special Purpose Entities” (SPEs; or substitute “Vehicles” for SPVs - the sorts of corporate shenanigans that brought down Enron) and “Structured Investment Vehicles” (the SIVs mentioned in the article) allow corporations, under certain circumstances, to omit some types of financial transactions from their publicly reported records and results, making these transactions at best opaque, at worst invisible, both to financial analysts and to government regulators. Because the financial dots are not publicly connected, events can have unanticipated consequences, resulting in market instability.
These unanticipated consequences come into view only after the fact, making it difficult for markets to smoothly deal with these sorts of crises. The markets have to react on their feet, as it were, which can lead to irrational behavior, herd-think, and panic.
It’s important to realise that this is a result of man-made rules, and not the inexorable workings of pure economics. Dangerous conditions can be ameliorated by changing the rules to prevent corporations and their legal and accounting handmaidens from gaming the system. At root is the fact that gaming the system has financial benefits for the bottom line, hence there are incentives for playing these balance sheet games. Unfortunately, every change in the accounting rules spurs lawyers and accountants to come up with ever more “creative” ways to take advantage of the new rules. I think that these fundamental problems may be addressed only by completely re-thinking corporate law and governance from the ground up - but that’s a story for another day. :-)