From Volume 5, Issue Number 16 of EIR Online, Published Apr. 18, 2006

World Economic News

IMF Official: Will 'Faustian Pact' Wipe Out Pension Savings?

The latest "Global Financial Stability Report" (GFSR) of the International Monetary Fund (IMF) was presented on April 11 in London by Gerd Haeusler, head of the IMF's International Capital Markets Department. At the press conference, which took place at the Bank of England, Haeusler claimed that "the near term outlook is as good as it gets," and then listed a series of potential risks, such as over-indebtedness of corporations due to leveraged buy-outs, "the turning of the credit cycle on housing and mortgage markets," "the risk of a disorderly adjustment of global imbalances," and "the credit derivatives market." Finally, he ended in quite surprising way:

"Let me conclude my opening statement with an almost philosophical statement as to modern capital markets. A year ago, our GFSR called private households 'the shock absorber of last resort'"—meaning somehow that financial markets are being maintained these days by ever more private households putting their savings into the various financial assets. However, said Haeusler, these people "often know very little" about the risks involved. "If their expectations, explicit or only implicit, are not met, their dissatisfaction and disappointment may turn into a political liability for the authorities, to prompt them to support markets 'which are too important to fail.' Coming from the culture of Goethe, such a situation has something of an implicit Faustian pact: the household sector is invited in to participate in the search for yield. But the 'dark side' of such pact is, of course, to be included in the risk-sharing as well; visible only when asset prices start to fall significantly and Mephisto asks for his side of the bargain to be fulfilled.

"We are talking about a mine field of potential conflicts of interest or worse," Haeusler continued, which "could discredit a capitalist and market-based financial system," and "backfire in an unprecedented way."

He further cautioned, "A low level of financial literacy, combined with extensive risk taking, is politically an explosive brew."

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