By Dave Anderson:
If I am given the unavoidable choice to either take a kick to the groin OR a kick to the groin and a baseball bat to my knee, I am reluctantly taking the first option as more pain is not desirable nor does blowing out three ligaments help me avoid a kick to the groin. In the first instance, I am in pain, unable to speak and unwilling to move. In the second case, I am in pain, unwilling to speak, and unable to walk for months for no good reason.
This is the basic economic choice that the West has been putting off for the past couple of years.
Calculated Risk has the latest Greek interest rates:
The yield on Greece ten year bonds increased to 15.3% today and the two year yield is up to 24%. It seems like the markets expect a credit event soon.
All of my credit cards have significantly better rates than Greek 2 year bonds. The Greeks will need to defailt soon and force the bondholders (including many German and French banks) to accept losses because the banks failed in their function and rationale for existance in effectively pricing and assessing the risk of illiquid assets.
The Greeks could have made this decision two years ago. The pain would have been real, as the Greek government would be cut off from foreign credit markets, and it would not have the luxury of devaluing to encourage an export boom becuase of the iron fetters of the Euro, but the primary budget balance could be improved as interest expenses and debt service costs collapsed in default. Instead the Greeks engaged in mass austerity as their creditors and their politically dominant neighbors forced the Greeks to extend and pretend that they truly are solvent.
The Greeks are the easy international example. In the US, most banks are still sitting on massive chunks of Big Shitpile of bad mortgage debts that they won't clear from their books as doing so will force them to realize profits. So they allow bad loans to sit at full value in the hope that the housing market will recover soon enough despite the existance of at least another five years of inventory overhang. Extending and pretending works for the banks, as that allows them to book paper profits and distribute bonuses, but it produces crappy real world results.
This is part of a dynamic we have seen before. By insuring that the entire world is in trouble a relatively small number of criminals, mostly in New York but with professional ties around the market world, will once again escape notice and live to steal another day.
ReplyDeleteOld cowboy movies had a similar plot line. Bank robbers would set fire to a hotel or other building and while everyone ran to help put out the fire, the bank became an easy target with only a couple of unlucky subordinates left behind as everybody else ran out to watch or fight the fire.