Frank Knight

It's 2008 all over again in many ways. And as was the case then, again uncertainty has taken over from risk. In Knightian terms, uncertainty is the worst you can get, far more worse than risk. Risk is to some extent quantifiable, uncertainty isn't. And when uncertainty kicks in, economic agents tend to take decisions which make perfectly sense on an individual basis but when it occurs on a mass scale, the outcome is uncertain as well. And looking at financial markets right now and recent developments, it's not getting any better : a lot of risk indicators have even crossed certain 2008 barriers and it's not restricted to CDS levels. And as far as interbank markets are concerned, it's certainly 2008 all over again. The last couple of days we have seen stories confirmed over large Chinese commercial banks cutting off funding lines with some core-European banks and Far East banks doing the same with banks having a considerable exposure to PIIGS debt. All hands on deck, scrambling for money before you lose it to some one else. Just have a look as well to LIBOR USD and GBP rates which are constantly moving up on a daily basis, despite the central bank policy outlook of near zero rates for a considerable period going forward.

But the most extra-ordinary story came from Siemens removing its excess cash reserves from private banks and parking its piggy bank within the ECB. Another fine example of "better safe than sorry" or "if you don't know, you don't take the risk". So Siemens is one of the rare agents - be it corporate or sovereign - having "pocket kings" and folding the hand of "cowboys" even before the flop appears on the table.

I would finally also like to comment on savings' accounts and inflation linked to this issue. Over the last couple of months, over and over we were told that parking money on a savings account generates nothing so you should seek your luck in other assets. Inflation corrected, you even lose money on your account. And monetary policy in most corners of the world is exactly trying to tempt people into this zero interest rate mouse trap.

1) If our retired citizen would have followed this advice at the start of 2011 and emptied his savings account, he would have lost far more on playing risky assets, ranging from -6% on high yield and some emerging market bonds to 20%-50% or more on equities, depending on his "safe" stock picking. The 1 or 2% real loss on his savings seems peanuts at this point.

2) Emptying the savings' account has apparently not solely being executed for "risk loving" motives, these days the Siemens and others are moving out because of precautionary measures. This is not good, this is not healthy and it undermines the entire economic radar work. Everything stands or tumbles over matters of trust.

3) Our retired citizen & good father housekeepers of this world should not be faced with these choices or considerations. Or in poker terms, it's not just a choice of folding pocket kings : they shouldn't be invited around the table in the first place.