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Hedge vs. Pandemic Econ Consequences
Inappropriate to compare hedge fund crash with a flu pandemic
By Vanessa Rossi and Paola Subacchi
Published: June 12 2006 03:00 | Last updated: June 12 2006 03:00
Sir, Along with many of your readers, we anxiously read the article "ECB warns of hedge funds risk to stability" (June 2). But the message given seems depressingly off the mark. While we fully appreciate that economic losses, based on indicators such as annual gross domestic product, do not include assessments of loss of life or cumulative losses, we wonder on what basis the assessments of the relative impacts of pandemics and hedge fund risks have been calculated.
In financial market dealing it is typical that there are gainers and losers in any operations and with respect to market movements - so there are regularly "distribution" effects from these dealings and sometimes these may be very large, causing confidence problems. But impacts on the wider economy are unlikely to be large scale or long lived and these problems can be handled, especially with the help of central banks (ie, a liquidity loss can be offset and other measures taken to restore confidence). Furthermore, if the European Central Bank is worrying about the impact on commodity prices - financial investors pulling out of speculative trades would cut prices and the general economic impact might actually be positive even if this had an impact on the wealth of fund holders. Wealth effects are usually quite small in most countries, with the main impact being felt in the US, not the European Union, as seen in previous stock market crashes.
We accept that if there were to be a big enough pull-out from equities and bonds worldwide, which is hardly likely, then in theory there could be a widespread meltdown in asset prices and wealth, but there would have to be an incredibly serious dash for cash for this to happen, as more typically one market loses and another gains, as in a switch from equities to bonds or commodity trades to bonds and so on. And ultimately a dash for cash cannot last long since money has to go somewhere. Plus, in relation to emerging markets, the economic impact of such a scenario would be short-lived unless central banks made some truly terrible mistakes in policy.
In comparison, a serious human flu pandemic (leaving aside an avian flu) would hit the poor hardest and would savage the world economy for at least a year and probably two. The impact of just a couple of months of Sars in 2003 did similar damage to the Hong Kong economy (pro rata) as the 1998 crisis (which was unprecedented in its severity and hit all asset markets in Hong Kong extremely hard). Sars actually did even more damage to services trade and this was a very limited disease scare.
The collapse of a key hedge fund would indeed be damaging, but to rank it in the same bracket as the potential effects of a flu pandemic seems na?ve and rash. One might expect an institution such as the ECB to be more guarded before making such inappropriate comparisons
The reliance on central banks to always be able to fix all global problems is hilarious. The collapse of a key hedge fund could affect many markets with financially severe consequences.
However, the economic consequences of a pandemic would dwarf the markets' collapse as it would affect both the markets and all other sectors of the economy.
By Vanessa Rossi and Paola Subacchi
Published: June 12 2006 03:00 | Last updated: June 12 2006 03:00
Sir, Along with many of your readers, we anxiously read the article "ECB warns of hedge funds risk to stability" (June 2). But the message given seems depressingly off the mark. While we fully appreciate that economic losses, based on indicators such as annual gross domestic product, do not include assessments of loss of life or cumulative losses, we wonder on what basis the assessments of the relative impacts of pandemics and hedge fund risks have been calculated.
In financial market dealing it is typical that there are gainers and losers in any operations and with respect to market movements - so there are regularly "distribution" effects from these dealings and sometimes these may be very large, causing confidence problems. But impacts on the wider economy are unlikely to be large scale or long lived and these problems can be handled, especially with the help of central banks (ie, a liquidity loss can be offset and other measures taken to restore confidence). Furthermore, if the European Central Bank is worrying about the impact on commodity prices - financial investors pulling out of speculative trades would cut prices and the general economic impact might actually be positive even if this had an impact on the wealth of fund holders. Wealth effects are usually quite small in most countries, with the main impact being felt in the US, not the European Union, as seen in previous stock market crashes.
We accept that if there were to be a big enough pull-out from equities and bonds worldwide, which is hardly likely, then in theory there could be a widespread meltdown in asset prices and wealth, but there would have to be an incredibly serious dash for cash for this to happen, as more typically one market loses and another gains, as in a switch from equities to bonds or commodity trades to bonds and so on. And ultimately a dash for cash cannot last long since money has to go somewhere. Plus, in relation to emerging markets, the economic impact of such a scenario would be short-lived unless central banks made some truly terrible mistakes in policy.
In comparison, a serious human flu pandemic (leaving aside an avian flu) would hit the poor hardest and would savage the world economy for at least a year and probably two. The impact of just a couple of months of Sars in 2003 did similar damage to the Hong Kong economy (pro rata) as the 1998 crisis (which was unprecedented in its severity and hit all asset markets in Hong Kong extremely hard). Sars actually did even more damage to services trade and this was a very limited disease scare.
The collapse of a key hedge fund would indeed be damaging, but to rank it in the same bracket as the potential effects of a flu pandemic seems na?ve and rash. One might expect an institution such as the ECB to be more guarded before making such inappropriate comparisons
The reliance on central banks to always be able to fix all global problems is hilarious. The collapse of a key hedge fund could affect many markets with financially severe consequences.
However, the economic consequences of a pandemic would dwarf the markets' collapse as it would affect both the markets and all other sectors of the economy.
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