Grease is the time
Is the place
Is the motion
Grease is the way we
Ok. That was too easy.
sovereign teeterings we are seeing these days should not be too surprising given
all the government support programs put into place over the last two years. But
what is really going on here?
I believe the challenge we face is more
cultural than financial.
Today, the inhabitants of our global society
"feel bad" when their efforts fail. That is only natural, but we've now taken
this tendency to a new level where society attempts to forbid
Certainly systemic risks were on the rise in late 2008 when it
seemed a few well-placed bankruptcies would bring down the entire global
financial sector. Our response — again, globally — was to write checks to the
at-risk institutions, taking money from the broad tax base in order to "save the
Unfortunately, when filling holes, the dirt must come from
Contributing billions in direct support and providing
insurance programs in the trillions does have a cost. In the U.S. and elsewhere,
governments borrowed to fund these bailouts at an ever-increasing pace. There
was little concern regarding lender participation as investors ran for the
safest investments around: government securities.
But, of course, not all
government securities are alike.
What we are seeing now in Greece is a
second level bailout — the first referring to massive spending on the part of
the Greek government. European governments are now looking at their Greek
brethren and are concerned that a bailout without a local cost will only
encourage the moral hazard we all know exists today.
allowing a failure could create a domino effect across other European nations
(and thus the creation of colorful acronyms like PIIGS — Portugal
Italy Ireland Greece Spain — and PUKE —
Portugal, UK, EU). So once again, the powers that be are
faced with a difficult decision: rescue the bad seed or let it fail?
EU, for its part, is concerned that providing such a rescue would put the entire
union at risk if investors become concerned about out-of-control spending with
insignificant future revenue stream increases. The self-fulfilling prophesy
rears its ugly head.
The story is no different in the U.S. — we just have
some extra cushion. In fact, on a regular basis, the ratings agencies warn that
our AAA-rating may be in jeopardy. (Tim Geithner's recent response was a promise
that the U.S. will "never" lose its AAA rating, but didn't he also promise to
pay his taxes when he went to the IMF some years ago?)
At the end of the
day, it seems that letting a few banks fail a few years ago would not have
created the same fear of systemic risk as possible country defaults today. And
at some point, losses must be realized instead of simply passed on to supposedly
deeper pockets. Ain't hindsight great?
This Way to the
Last week, Bernanke tentatively laid out the next possible
steps toward tightening monetary policy, which focus on controlling the rate the
Fed pays banks for deposits. By raising this rate, the banking system will be
encouraged to place more funds on deposit with the Fed, thereby taking them out
of the system.
In addition, he repeated the current mantra that low fed
funds rates will remain in place "for an extended period," suggesting such steps
are in the distant future.
What lies in the near future is a possible
increase in the Fed's discount rate, the rate at which weaker banks borrow
directly from the Fed. Bernanke made it clear that raising this rate will be
geared toward discouraging such borrowing and should not "lead to tighter
financial conditions for households and businesses and should not be interpreted
as signaling any change in the outlook for monetary policy."
like the Fed is not ready to grab the punch bowl, but it is beginning to eyeball
Wholesale inventories in December
declined by 0.8 percent versus expectations of a 0.5 percent increase. Both
durable and non-durable goods contributed to the decline, which could lead to a
downward revision of fourth quarter's GDP figure.
Retail sales in January
rose 0.5 percent after declining slightly in December. There has been a
moderate, but consistent, rebound in retail sales since the height of the crisis
in late 2008. Given the current stall in unemployment growth, continued momentum
in retail sales throughout 2010 is possible barring another negative shock to
The EU has announced plans to bail out Greece, but the
details are few. They find themselves in a Catch-22 where non-action could drive
investors away from riskier sovereigns in the region and a full bailout could
encourage wild spending on those same nations.
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