This book, entitled
Financial Shock, reveals detailed operation of the
derivative market in
the shadow banking system. The main subject--sub-prime mortgage--is deeply discussed both in the technical and historical-structural perspectives. In this book readers can see the systemic destruction of American
financial system. There are many factors that cause the destruction. The development of financial sector is always excessively exposed in the first list. Next, the declining responsibility belongs to both the giver and the receiver of credit/ loan. Another factor is the loose regulation and weak law enforcement. However, it is not only technical matter and law and American domestic factor. The problem is more complicated than one imagines because it deals with the global economy. There is a "Chinese factor" involved. It is related with the deficit balance of US current exchange that rapidly goes out to pay for the import. Logically, the going-out money will go back to USA in form of obligation and other valuable letters. At first, they were sufficiently satisfied with the moderate high rate of profit as offered by the US Treasury Bonds. In its development, the demand of financial instrument had increasing high risk. Therefore, the market of
derivative product such as the loan based on sub-prime mortgage became the favorite. This fact implies that US government needs to innovate derivative products to compensate the deficit budget. Problem became greater due to monetary factor. To face the deflation and the declining of the competitive power of US economy, the central bank (The Bed) lowered the interest rate greatly. In summer 2003, the US interest rate was in the lowest point. Thus, liquidity flooded the market. One of implication, credit was given to those who were not feasible, including the credit to buy a house. That was why the sub-prime mortgage largely develope. Generally, this was what the shadow banking system offered. This book describes (p.121) the amazing scheme of modern banking system. The traditional banking only functioned to keep the fund from the third party and later distributed it in form of credit for domestic and industry. On the other hand, investment companies offered various derivative products that functioned to divide risk. Financial innovation proved to give so much profit that it improved the financial market that exceeded the US national income. In practice, basically the financial instrument hid the risk from the old transaction and created bigger risk with new transaction. In such complexed system, each party felt that the other party should be responsible. Thus, in the complexed financial system where the risk was sophisticatedly divided, the systemic risk became greater. When all parties should be responsible, no parties should be responsible. And the main problem was that they felt that they did not have any problem. At last the government should suffer the destructed asset that was only bubble. In future, the financial market should be rigidly regulated. The problem is that the regulation is the job of politicians that tend to be rhetorical. In this context, financial industry has prepared the lobyer to make the regulation in financial sector not disturb their existence.