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'The devil is in the details'

Blu Putnam, Chief Economist, CME Group, delivers the keynote speech at the fifth annual Cass-Capco conference

"We are in a very messy situation where the devil is in the details", was the message delivered by CME Group's Chief Economist, Blu Putnam in the keynote speech of the fifth annual conference of the Cass-Capco Institute Paper Series on Risk.

In the speech entitled 'Risk Management in the Era of Dissonance,' Putnam cited three areas of concern for the global economy: population, property rights and policy. 

He identified 'The Elders', for example China, the US and the UK. These economies have older populations who are concerned with protecting their wealth and health, thereby directing policy toward slower growth and decreased inflation.

The 'youthful nations', such as Brazil and India, have over half their populations under the age of 30. Discourse surrounding fiscal policy in such countries is focused on job creation and faster growth and subsequently these economies have a higher tolerance for inflation.

Putnam described the difference between the 'elder' and 'youthful' nations as one of the major sources of dissonance in global risk management at this time.

Added to this contrasting economic pattern is a back drop of uncertain legal and political change. In the US, the Dodd-Frank rules are still undefined and in Europe the introduction of a financial transaction tax could damage already fragile markets. This renders the 'pendulum of property rights swinging in favour of the emerging economies.'

Finally, Putnam addressed the fiscal restraints exacted on the debt burdened, mature economies as opposed to the emerging market economies that are relatively debt free. The UK's austerity budget is increasingly criticised for suffocating growth, the 'protracted fiscal drag' from the solution to the sovereign debt crisis in Europe and the postponement of any policy changes in the US until after the election could contribute to constrained growth for a number of years.

Putnam concluded that risk management models, based on traditional assumptions, can no longer be relied upon in the same way in this 'Era of Dissonance'.

He said, "Risk models become wrong because their assumptions are wrong. Volatility is in fact volatile."

The full day conference at Cass continued to explore the issues Putnam raised. Panel discussions with leading academics and practitioners examined areas of economic risk, financial risk management, regulatory risk, central counterparty alternatives and operational risk.

Watch Professor Philip Booth discuss financial risks as policy makers look to exit from quantitative easing

Download the full report from CME Group on the Era of Dissonance

View the presentations.

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