For everyone struggling to get their arms around the debt crisis in Europe, Bill Marsh in today's New York Times offers literally a compelling picture, with graphic illustration for the key issues.
The picture is big, 18×21 inches. Either you need a very large computer screen or a hard copy of the paper (pp. 6-7 in the Sunday Review section, "It's All Connected: A Spectator's Guide to the Euro Crisis).
The main debt linkages across borders for which we have data are all here -- and the graphic pulls your eye appropriately to the centrality of Italy in whatever happens next. (On why eurozone policy towards Italy now matters so much -- and what are the options -- see my recent paper with Peter Boone, "Europe on the Brink".)
But you might think also about what is not in the NYT graphic because we lack reliable information. For example, what is the exposure of US financial institutions to European debt, directly or indirectly, through derivatives transactions of any kind?
The opaqueness of derivative markets means that most investors can only guess at what could happen. Most of the relevant regulators and supervisors with whom I have talked seem also to be largely in the dark -- remember the experience of AIG in 2008.
Cross-border bank exposures through loans and other holdings are publicly disclosed -- data from the Bank for International Settlements are represented by the arrows in the NYT graphic. These data are surely not perfect, but they do convey the main points and they tell you where to focus attention.
Why do we not require publication of similar data, preferably by financial institution, for all derivative transactions -- including both gross and supposedly net exposures across borders?
Cross-posted from The Baseline Scenario.
Despite this lack of value creation, Greeks expected to retire early on high pensions with free medical care and live happily ever after. Then reality set in. The rest of Europe is going to feel the effects of this as other countries such as Italy, Portugal, Spain, and Ireland are headed in the same direction. The US will be negatively impacted as well, but not as badly since we do not rely on the social welfare system as Europeans do, thank goodness.
We need to stop spending money and get our budget in line so that when crises come, we will have the economic wherewithal to handle the crisis.
Besides, continually spending more than what you make is not sustainable in the long term and now we are in the long term with Greece and some other countries. The benefits that they have lived for years now have to be paid. This is much like the guy buying the big screen TV he could not afford and now the bill is due and he can't even think of not having the big screen TV and not only that, expects it.
A country cannot afford the crisis unless it creates value that others want to buy to be able to pay it off. Greece doesn't generate enough value to pay for their lifestyle. What do they export? Olives? What do they make? Cars, electronics, software, etc. -- NO. What services do they provide? None.
No amount of more borrowing is going to solve the crisis. Who is going to loan more money to Greece without guarantees. Printing money and inflation is not the way out, we have seen what happens with Germany after WWI and South American countries in the 1980s.
Austerity will bring short term pain, but is the only way to set the basis for real growth, not inflated growth propped up by borrowing or printing money. This is like the junkie who is kicking the habit. He has to go through pain in order to come out the other side better. Governments continuing to spend and print money are simply like those people who enable addicts to continue in their illusion of prosperity.
http://viableopposition.blogspot.com/2011/04/debtworld-were-drowning-in-sea-of-debt.html
The sovereign debt for the world's developed economies is anticipated to rise from 91 percent of GDP at the end of 2009 to 110 percent in 2015, an increase of 37 percentage points since the beginning of the Great Recession. There is no way that the IMF, World Bank, ECB or any combination of the above can bail the world out of this mess.
Of course there is growing debt. Under a money supply system where new money is created by banks issuing loans ( with money they create out of nothing ), any economic growth requires growth of public / private debt. Ever think of where that money we borrowed came from? Banks are able to loan more money then they have, thus the market controls the supply of money.
Sov debt in the countrys own currency does not matter, they alone have the monopoly of that currency. The euro is a problem bec none of these countrys control thier currency, thus currencys cannot rise and fall reflecting the actual market conditions. It is doomed to fail.
Since that is not the case, I agree with your conclusion that it is doomed to fail.
Somebody...please explain!
I have followed your views over CSPAN etc also. I am grateful for the efforts by people like you to make people more aware.
However these are my thoughts after hearing similar views: OWS is still too young. Our two major political establishments just wont do anything substantial as we have know it all along. So what is our frustrated silent nation expected to do at this point? Thanks again for your views in future articles.
fearful, angry and careful !
Ponzi Scheme, Fraud, Larceny, all three ?
Tim and Obama throw Big Bucks around like 20's Gangsters !
All just Paper Promises, Promises, Promises. Growth slows to 1 % for ten years.
Biggest Heist in the History of the World ! Hollywood needs to make a Movie !
PIIGS in pokes - current reality.
Hernando de Soto on "The Cost of Financial Ignorance" - "Over the past 15 years, however, as they package, bundle and resell securities, Americans and Europeans have gradually undermined the reliability of the records that guarantee or make credit trustworthy — the deeds, titles, liens and other documentation that establish who owns what and how much, and who holds the risks."
See whole article:
http://www.washingtonpost.com/opinions/the-cost-of-financial-ignorance/2011/10/03/gIQAEU3yTL_story.html
Naked CDS's must be banned:
Credit Default Swaps are simply the ties that bind, and the fuel that fires "Too Big to Fail." Further, in their naked form, they are nothing more than third party bets masquerading as insurance. Often these third party CDS bets are not really bets at all since their outcomes can be substantially influenced or manipulated.
Most ominously, Credit Default Swaps are instruments that reward and encourage economic failure and therefore run counter to positive entrepreneurial capitalistic goals. As a result, when a company fails or when a house defaults, third party bets are paid off--- Americans lose their jobs and homes, and some unknown entity actually benefits. This is the corrosive and ever growing effect of these instruments that Warren Buffet famously called "financial weapons of mass destruction."
Classic 60 Minutes Report on Credit Default Swaps: http://www.cbsnews.com/stories/2009/08/19/60minutes/main4546199.shtml
NPR: "AIG And The Trouble With Credit Default Swaps" *With audio link:
http://www.npr.org/templates/story/story.php?storyId=94748529
I like your Ideas.
Maybe all of the recently created new financial products, and similar new toxic asset products created by the Wall Street master financial geniuses that created various derivative and other junk bond type freshly printed paper securities out of the thin air should require a separate application and a separate license granted by the SEC for the creation, existence and/or sale of each and/or any new financial product.
Maybe the SEC should require/grant license only to those that have intrinsic collateral value, are easily understood, are transparent, forthright, and are not deceptive in their sworn financial statements filed with the SEC.
Maybe the SEC should also require a study to justify the need and define the value of any new derivative type instrument created, similar to an Environmental Impact Statement.
When the financial risks are several layers or completely removed from the title to the actual asset that has some actual collateral value (like a Mortgage, Bond, Property Title, Stock Share, Promissory note), and this instrument is insured from most of the investment risk, how much due diligence will an investor perform before he will commit to purchase, as compared to the investing into a primary mortgage or similar instrument that is collateralized for the event of failure?
If I were driving a car without insurance, I would probably drive more carefully than if I had insurance since my exposure for loss is lessened with insurance coverage.
These freshly printed financial products are similar to a virus, because once they are created, they tend infiltrate, contaminate, multiply and destroy the basic economic foundations of the US economy, and then other Wall Street financial geniuses emulate these successful financial geniuses and then create and sell even more of these new imaginary assets.
There are two sorts of derivatives deals. In one, an end user is paying money to get rid of risk that he is not willing to bear. He recognizes that he is paying cash for a service, and it is worth the money to him. There is nothing wrong with this, that's what insurance companies do.
But the financial institutions who have derivatives among themselves are engaged in a poke game. Each one thinks he is smarter and savvier than his counterparty, and will win the pot. Of course, they can't all win, but it wouldn't be much of a poker game if everyone could see everyone else's cards This market makes if possible for the first type of customer to buy the derivatives they need easily, but that is hardly the point.
Share the risk and the profit, but that was derrived from something with real monetary value.
They might make it to Tiananmen Square, but not much further than that.
I know very little about this issue, but I will venture to make a guess that Republicons in Congress are blocking any kind of transparency for derivative transactions in the United States.
Maybe somebody should tell them that they are a huge liability of global capitalism.
Nineteen heads of state/heads of government attended plus seven chairmen/presidents of international organizations (like EU, UN, AU, etc. ). So, 26 names. Pick two names who pretty much all but completely got the topic off the agenda? :) (hint, the summit happened before the change from Prime Minister Tony Blair to Prime Minister Gordon Brown.)
http://www.monstersandcritics.com/news/business/news/article_1312937.php/ANALYSIS_Germany_concedes_G8_defeat_on_hedge_fund_code_of_conduct
The matter was a major issue in German media at that time.
And a former US under-secretary of commerce in the Bush administration, Grant Aldonas, made clear last week that control - even a voluntary code - 'won't happen.'"
As I said, that was in 2007, pre- crisis.