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Business Daily

Factual: Money

The daily drama of money and work from the BBC.

Business Daily: Naked finance 

18/07/2011

Naked finance 

BBC World Service - Business Daily, Naked finance

The financial incentives which may make eurozone disaster more, not less, likely

It is not just debt we have to worry about. The complex world of international finance has created incentives which make disaster more, not less, likely.

We heard a new metaphor for Europe's debt crisis last week.  Giulio Tremonti, Italy's finance minister called it "a crisis moving through the world like a mutant".  The mutant continues its rampage this week as the International Monetary Fund describes Greece as balancing on a "knife edge".  

And it isn't just debt that is powering the mutant. Another problem is how complex international finance has become. Hedge funds and investment banks have developed all sorts of new products and tools which may be making Europe's debt problem even harder to solve.  

In the first of two reports on this new financial complexity Michael Robinson has been investigating the strangely named Naked Credit Default Swap - a relatively new, but increasingly important, part of the financial world. 

Naked Credit Default Swaps really are as complex as they sound, but strip away the jargon and lots of other theories and concepts in business are actually much simpler than they appear. Take - for example - the Stock Sandford Corollary.  Business guru Rene Carayol explains this key law of business.

Plus, the whole idea of business is to add value. Take a raw material - wood, for example - and make it into a chair and you've added value. The value lies in how useful the product is.  

These days you don't even need a tangible material in order to create something useful. Computer programmers conjure useful and often very valuable products out of nothing at all.  Lots of services - hair-dressing, accountancy, even radio presenting - do the same.  

But can an activity that serves no useful purpose at all add value? According to our regular commentator, Lucy Kellaway of the Financial Times, the answer can sometimes be yes.

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