As Tolstoy was said to have scribbled in the notes of his unpublished economics textbook, before happily switching over to Anna Karenina.*
Tyler Alex and I have been arguing beneath an earlier post about Greek/UK differences. I’m on the ‘Niall Ferguson Wrong Again’ side, but this does NOT mean that I lightly dismiss the problems of the UK. Our massive government deficit is mitigated by our having our own currency, longer-dated debts, and a much lower current account deficit. But the government still has massive challenges in turning the ship around.
Ed Conway has written a column examining what an incoming Chancellor could do. Read it. It happily takes up one of my suggestions: for an incoming government to look at redirecting the Bank of England to target Nominal Growth in GDP. It has some striking suggestions: a debt tax – now that would be like sticking a hand grenade in the hen house – and some that just don’t work for me – the Office for Budget Responsibility (which I don’t like) has Ed writing
It’s not a bad idea: the nasty decisions would be left to experts, not politicians.
Um, that sounds like an Office for the Politicians Not taking Responsibility. Ed sensibly goes on to argue against getting in the IMF to do an audit. I think the IMF will be busy enough ….
…. which brings us back to Greece. Gillian Tett cleverly asks whether Greece is producing a Bear Stearns moment. This is a great insight (and a scary one):”
But the second reason why Bear had so much impact was that its implosion tipped investors into uncharted psychological waters. Before 2008, most investors found it hard to imagine that a Wall Street bank could collapse; afterwards, however, once-unimaginable scenarios became frighteningly easy to depict.
She goes on to say:
Just as investors used to fret about all the “interconnections” between Bear and other banks, they are now grappling to understand Greece. How many Greek bonds do German banks hold? What does Portugal owe to Spanish entities? Nobody truly knows.
Ah, but the New York Times has had a go at it here. Which is one reason Johnson and Kwak are convinced that this is no longer just about Greece any more. The way they – and Gillian – are presenting things is that for 2008, read 2010, for Banks, read Countries.
And I have a problem with this. Countries are not ‘linked with numerous other entities via a complex web of dealings that few people understood’ like the Banks are or were. The failure of Greece would produce a hit to a number of important portfolios – but it is not the custodian of important dealings between hedge funds and other finance houses, so that its failure would leave big financial players looking at their account sheets and saying “WTF? I don’t know what I have any more!!” – which is what the failure of Lehmans did to many many big players (read crisis literature, ad nauseam).
Banks also have intrinsically unstable funding structures – long the illiquid LT stuff, short the liquid ST stuff – and were 30 times leveraged. Lehman was insolvent but not intrinsically incapable of earning because of uncompetitiveness – unlike Greece in the Euro (see Krugman). And that NYT graphic does not disentangle the natures of the debts – whether owned by private or public entities, on what schedule, with what transparency. So, like the “UK is Greece” analogy, “Greece is Bear Stearns (and therefore Spain is Lehmans!)” is more alarming than helpful.
*this is pre-recorded. I am heading out to Richmond again. …