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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And let's not forget… Bear Stearns got “rescued” … not in name, but certainly in liabilities. Even if Greece gets the bailout her government wants, it doesn't end the risk of “contagion.”
Contagion obviously being CNBC speak for everyone finally realizing how awful the balance sheets of these countries look and how stupid continental currencies are.
Hold on to your hats folks!
I think the Kling, Roberts, Boudreaux version of the crisis and its mechanisms – and its implications that they hesitate to spell out – is about the most accurate of all.
Fastforwarding their mechanism leads to an upsetting scenario of very high inflation and highly inflated government mechanisms of force, amongst others.
Is this a case of these really clever guys sketching a scenario that we should consider calmly, knowing – at some level – that scenarios never turn out as bad as when one sketches them? Is it just an illustration of the mechanism – like something from an economics class?
Or should one prepare as best one can for – given the logic of their arguments – “something that won't end well?” It is all a bit surreal and difficult to assess whether I'm going about this calmly or unrealistically and emotionally.
'Tis a problem.
Just wondering why Roberts or Cowen or any economist for that matter is not celebrating Cinco de Mayo. It celebrates the 1862 Battle of Puebla in which the Mexican Government defaulted on its debt and took up arms instead of paying interest.
So who will be Lehman Bros.? Spain? Italy? Should we get a pool going?
Is it a bad omen that this is in the shape of a pentagram?
Individual Italian citizens own French banks $511 billion, or the Italian state owes French banks $511 billion? If we're discussing “sovereign debt” here, the distinction between a “bail out” and simply raising enough taxes to service the debt seems entirely academic. Sovereign debt is already a bail out.
That's an interesting take … but it's a bailout that isn't evenly spread throughout society, nor asked for by most members of society.
For a large number of reasons, I don't like the implication that a people should be responsible for the actions of their collective government.
I don't even like the idea that it's “their collective government”. The United States government is a group of armed men, centered in the District of Columbia, imposing their systematic will on 300 million other people. It has nothing to do with me, except insofar as I yield to armed forces that I can't easily escape. I'm not loyal to it otherwise. We might as well discuss the local mafia, and if some other mafia comes along with sufficient strength to resist the DC mafia and offering a better deal, I'll sign up.
In your own essay you admit your theme is completly with out evidence and presumptious. I went through it loooking for evidence that you had showing bankers or experts in the field admiting as much as you claim on the issue of government gaurentees.But at least you admitted this was pure conjecture.
What isn't conjecture i why your time line starts 30 years ago. Why were there no major bail outs the 40 years prior to that. And why did this final one become so big.
A reading of and a word search of your 40plus page essay for derivitive comes up wih zero finds. Zero? This crisis…Greece… could not have happened with out complex securitization schemes, a hands off regulatory sructure and opaqe derivitives. You are so far from being objective on these issues Ifind your advice to Europe to allow Greece to crumble with out much authority.
Of all the people you talked with in copiling your essay I have to wonder how many where people with different perspectives on the cause of the crisis.
I find explainations from people like Christopher Whalen and others directly involved with risk management far more convincing then the explainations of economist on one side or the other of the economic political fence clearly defending their cause.
http://www.rcwhalen.com/pdf/AB_Securitization_0...
Yes and here contagion is called regime uncertainty…. continuing the lack of honest objective discussion.
Is there any difference between government and mafia other than the number of guys with guns?
Is there any difference between a private armed force with guns protecting the property of the private owner versus a mafia gang?
I'd be interested if you guys could take a look at which of these 5 countries (if any) is handling their debt situation in a responsible way. I heard a story on NPR about Ireland and how they have made cuts in government spending which has allowed them to kept their interest rates low and their credit rating good.
http://www.npr.org/templates/story/story.php?st...
Of course the commentator and someone they interviewed were angry because as everyone knows, in a financial crisis, governments should spend MORE money to get out of debt.
“You ended up with governments doing what they're not supposed to do, which is cutting expenditures and cutting wages, taking money out of the economy right as the crisis was unfolding,” says O'Toole.
Uhg. Anyway, I haven't heard anything on Spain or Italy, and very little on Portugal. Who has the best chance of coming out ahead?
I'm not sure that I understand your comment … would you care to elaborate? By “here” do you mean the US? I'm particularly looking for some clarification on what you mean by regime uncertainty.
Or worse, a Pentagon.
Define “property of the private owner”. Any mafia may claim to enforce what's “proper”, and practically every mafia does.
Markets acting in unison become inherently uncertain at the inflection point. Similar to the collapse of the Broughton Bridge near Manchester, England in 1831, a financial equivalent of the now–standard practice of breaking cadence when soldiers cross a bridge is needed. Structures like the Broughton Bridge have many natural low frequencies of vibration, so it is possible for a column of soldiers, marching in step, to vibrate the bridge at one of the bridge’s natural frequencies. The bridge locks onto the frequency while the soldiers continue to add to the excursions with every step, causing larger and larger bridge oscillations.
So to with the herd instincts of market practitioners, in a world of financial innovation and bubbles, it is “randomness” that includes both “uncertainty” and “risk” that should be the focus for robust governance. To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. The result is larger and more frequent boom-bust cycles.
Stephen A. Boyko
Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.
http://w-apublishing.com/Shop/BookDetail.aspx?I...
Where did the debt picture come from?
RE: my take on the crisis is perverse incentives of OPM
The flip side of TBTF is TSTS (too small to settle) counter-party risk.
We gave property rights to renters via NINJA, Liar, and stated (etc.) mortgages and then compromised governance with deterministic regulatory subsidies. Regulation produces oligopolies not competition. The GSEs (FNM and FRE) have lost in the last two years more than they made in the previous 30 years. But the GSEs fit the biases of Congress.
Congressional hearings are like examination papers:
• “C” papers provide an answer (no matter how shallow or misguided),
• “B” papers provide metrics to their answer to connect the factual dots to their rationale, and
• “A” papers ask the right questions to address foundational issues.
Therefore I argue that the nuclear question is:
If complexity exists, there is uncertainty. Can regulators govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime?
Stephen A. Boyko
Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.
http://w-apublishing.com/Shop/BookDetail.aspx?I...
IMF pays about 27% of Greece bailout, USA quota of IMF is about 20%, or about 8 Billion Dollars. Here is the kicker, the IMF loan is JUNIOR to the existing debtors! In other words, the existing debtors will get their 100%, just as Russ described in his Gambling essay. If Greece fails anyway, or the currency devalues, IMF and USA left holding the bag.
Good thing we have learned from the last two years – specifically, we have learned that lending to governments is safe, as long as you aren't the taxpayer bailing them out.
Again Russ, your paper makes what might be opaque in this situation appear crystal clear.
You would be acting just as the outer provinces of the Roman Empire acted in inviting in the barbarians. They were abused by Rome to the point they found the barbarians preferable to their Roman masters.
IMF pays about 27% of Greece bailout, USA quota of IMF is about 20%, or about 8 Billion Dollars. Here is the kicker, the IMF loan is JUNIOR to the existing debtors! In other words, the existing debtors will get their 100%, just as Russ described in his Gambling essay. If Greece fails anyway, or the currency devalues, IMF and USA left holding the bag.
Good thing we have learned from the last two years – specifically, we have learned that lending to governments is safe, as long as you aren't the taxpayer bailing them out.
Again Russ, your paper makes what might be opaque in this situation appear crystal clear.
You would be acting just as the outer provinces of the Roman Empire acted in inviting in the barbarians. They were abused by Rome to the point they found the barbarians preferable to their Roman masters.
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