Sitting at the table together

by Russ Roberts on May 5, 2010

in Gambling with Other's $

One of the themes of my take on the crisis is that the major financial players were lending money to each other and worried less than they should have about getting paid back because the government almost always bails out creditors of large failing financial institutions. When everyone is lending to everyone else in a with little or at least less worry than usual, you can really magnify the profits and the damage when it falls apart. And when it falls apart, because everyone has financed everyone else, you can justify bailing everyone out. I did not discuss the cultural aspects of this phenomenon but you can imagine how it is self-enforcing and how it discourages prudence and wariness. So this picture (HT: Tyler) makes me very uneasy:

It’s a bit vague because it talks about nations owing nations money. What it really is is a nation owing the banks of another nation money. So when the article accompanying the graphic says that Italy owes France $511 billion it means Italy owes French banks $511 billion. In today’s world, ‘m not sure that distinction has any signficance.

Rescuing Greece isn’t the end of the problem, it’s more akin to the Bear Stearns rescue of March 2008. It’s just the beginning of something that won’t end well.

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