There is a disease plaguing the global financial system that can be characterised as a willingness of governments to give up the responsibility to set the rules of money, and hand it over to private traders and the banks that facilitate the trading. In effect the umpire, government, has handed over the rules of the game to the players.
It is reminiscent of the three-person-chess that the eccentric character Sheldon invents in the television show The Big Bang Theory, which, according to the Big Bang Theory Wiki, 'utilises a non-standard, three-sided board with transitional quadrilateral-to-triangular tessellation to solve the balanced centre combat-area problem, additional (or fairy) pieces, and different rules for capture, move order, and game objective'.
Such gobbledegook sounds suspiciously similar to the application of mathematical models to financial securities in derivatives markets: high tech nonsense that can be brought undone at any time by the vagaries of crowd behaviour. The results have been sputtering economic growth, virtually no cost of money in most of the developed world and continual financial crises, mainly in the peripheral countries of the Euro zone.
The 'three-person chess' that financiers were allowed to create is called the derivatives market: transactions derived from more familiar activities such as bond markets, stock markets, currencies and bank debt.
Derivatives are a legitimate form of insurance if they are on the margin, but they have taken over. The global economy — the buying and selling of goods and services — is about $60 trillion. According to the McKinsey Institute global financial assets (shares, bonds, bank debt) are about $250 trillion. The Bank for International Settlements estimates the stock of derivatives is about $700 trillion.
Derivatives markets are driving what is happening in the 'real' economy and 'real' financial markets (the Greek and Italian financial crises, for instance, have a lot to do with the use of derivatives by those governments to cover their real debts). And that is proving extremely hard for economists and regulators to analyse. In effect, they are accustomed to analysing chess moves, not Sheldon's three-person meta-chess.
The International Monetary Fund recently conducted a conference to consider the future of macro economics as a discipline, which is looking distinctly frayed at the edges. IMF economist Olivier Blanchard expressed the widespread confusion:
Five years into the crisis, the contours of the macroeconomic policy of the future are only slowly coming into focus. From macroeconomic to financial stability, policy makers