It seems to me that both, Bernanke's critics (e.g. FT's Martin Wolf) and his advocates (e.g. WSJ's Greg Ip), write as if it were self evident where exactly the line dividing a few fools who made the wrong bets and the innocent "real economy" lies.
One will say that Bernanke has been swayed by the fools crying for a bail out while the other will says he hasn't. But before we decide on whether a clean surgical cut is in effect or nowhere to be seen in the latest monetary policy moves, one needs to see that the problem has not metastasized to a point in which bad and good financial cells are hard to tell apart.
The fact is that the central bankers do not know for sure. If the touted deepening and globalization of finance that media, academia, and think tanks have advertised in the last few years have advanced half as much as they say they have, then the distinction between the "few" fools and the "real economy" may be much murkier than the financial pundits would want us believe.
In a recent NYT's column, Paul Krugman suggested that the uninsured creditors that got the ABS's ball rolling behaved as unregulated bank substitutes. Not only how much, but also how specifically, have they substituted the banks in business, personal, and public financing in the last few years? What's the state of the respective balance sheets? How are those balance sheets interlinked?
The pundits seem to think that the corporate balance sheets are in good shape. Apparently, they hold a lot of cash. Not so fast! -- says Andrew Smithers in today's FT. In any case, parsing the data and doing the guess work to determine where this line (or something like a line) may lay must be a key item in the Jackson Hole agenda.
Is finance -- or beauty for that matter -- skin deep? This reminds me of the proverbial beautiful person (any gender is fine here) who wanted to be loved not for her/his looks, but only for her/his brains. Nobody could prove true love to her/his satisfaction and she/he always felt unloved.
7 comments:
Hi Julio. Don't forget a headline and our byline.
Can you give examples of a head- and byline for this post? Thanks.
I misspoke. You have a headline. (Watch the line breaks. Headlines are like poetry.)
A byline just means that under the headline you write:
"By Pancho Villa"
Pancho - welcome to blogging with a recommendation from MaxSpeak. Keep up his great work
Cheers
PGL of Angrybear
Hola Pancho,
The standout sentences in your post are:
"But before we decide on whether a clean surgical cut is in effect or nowhere to be seen in the latest monetary policy moves, one needs to see that the problem has not metastasized to a point in which bad and good financial cells are hard to tell apart.
The fact is that the central bankers do not know for sure."
Which is to say that the types of financial instruments used, the quantities involved, their global interactions and systemic consequences have, over the last 5-7 years (some say last 10), moved beyond the comprehension of any/all Central Bank and other 'players'. Nobody really knows what the consequences will be but I feel pretty confident that we've entered the realm of uncontrollability (and expect that more than a few quant funds began to understand this over the last weeks).
In the proverbial nutshell, nobody knows how much of what is where or what that what is worth.
Recall, problems were initially denied, then depicted as strictly subprime mortgages and said to be 'contained' which, so soon as some understanding of the financial engineering and the extent to which what used to be a simple mortgage reached into and through many private firms arose, was evidently ridiculous on its face, just as were notions that risk could be indefinitely displaced. So we have been seeing the asset backed commercial paper market freeze, prices for credit default swaps ('insurance') jump, forced sales and inabilities to mark-to-market without still greater losses, spreads beginning a process of 'normalizing', etc etc etc... From mortgage related instruments to corp. bonds, sovereign debt, foreign exchange markets, equity markets, more, none of which are simply national.
(For any in fact interested in easy to understand details, let me recommend the last few months at:
http://suddendebt.blogspot.com/ )
Crawling further into my nutshell, the old concept of fictitious capital seems quite applicable when looking to present real economy/financial economy interaction. That is, a giant planet encircling cloud of claims, claims to claims, claims to claims to claims,..., has been created, a 'cloud' which in the last instance is dependent on value created within the real economy, a cloud that cannot forever regenerate on its own basis nor injections of 'liquidity' but must and is 're-pricing'
While tempted to use the term 'debt deflation', it seems insufficient.
Great, first post on this board and I'm rambling.
Julio,
Hey, pay no attention to me. I am not aware of you being a tenured full prof. "Pancho Villa" has definite panache.
And, you are right that there is no clear line between the good, the bad, and the ugly here, especially with all that garbage tranched away into all those supposedly AAA packages. No wonder the risk spreads are so large out there, and no wonder everyone is expecting more major shoes to drop, with ongoing worries of a more serious unraveling going into major recession.
In any case, welcome.
julio
i know nothing about finance, but love IS only skin deep. no one but you loves your brains.
on the other hand, if you get married and live together for awhile, something like brains makes all the difference. you might even get to learn what love really means.
maybe this works in finance too.
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