Thursday, June 23, 2011

The Lehman Family

A prominent argument among those who want to avoid a Greek restructuring/workout/default at all costs is that it would trigger a new financial panic, otherwise known as Son-of-Lehman. If contagion spreads to Ireland or Portugal, Greece becomes Number One Son-of-Lehman, while the next in line becomes the Number Two Son-of-Lehman, and so on. If all hell breaks loose, and Spain or even Italy is forced to walk the plank, we could be looking at the Mother of all Lehmans.

And why is this?

It isn’t just the direct exposures of thinly capitalized banks that has Trichet et al. so spooked, it’s all the credit default swaps written against them. We don’t know how concentrated the counterparty positions are, nor how vulnerable the issuers would be in the event of a default. Even worse, we don’t know the volume, structure or anything else about the likely mountain of derivatives piled on top of all those CDS’s. This stuff is unrecorded and, at a system level, entirely unsupervised.

So the question is, have we run through a full Minsky cycle in only three years, or are we seeing another phase in the disorderly unwinding of the great financial pyramid of the 00's?

9 comments:

Shag from Brookline said...

Jon Stewart did a great Minsky burlesque of Greece yesterday (6/22/11) that may be not far from the truth.

Brenda Rosser said...

Re: "the disorderly unwinding of the great financial pyramid of the 00's?"

Well if they're all insolvent then it's conceivable to shut them all down and create entirely new institutions.

What would happen if the world lost its billionaires overnight?
What would happen if the top 1% of wealthy individuals lost 90% of their wealth in a week?

TheTrucker said...

Brenda is talking like a Tea Bagger!!! "Let's blow it up and start all over again"!

What may well happen is that people will finally come to realize that Jamie Galbraith and Randall Wray are correct in their analysis of money. They will realize that sovereignty is immune to bankruptcy in the sense that the term is employed in lay conversation. The guys that control the guns will extract the "money" necessary to the fulfillment of their purpose regardless of the disagreement of the proletariat. In theory a republican form a of government puts the proletariat in control of the guns.

Money is created when government recognizes it as money. Until then gold, shells, or blankets are a bartering tool. The European nations are not sovereign. They owe debts denominated in a currency not their own. They are more like California and Texas than they are like sovereign nations. The Federal Reserve of the USA created between 8 and 10 trillion bucks to prevent the meltdown of the capitalist system. All money is a unit of account witnessing a loan. And government operates just like a bank. Modern money is created as a loan and it is what the king's men will take instead of taking yer chickens or repossessing yer car. Taxation is what gives fiat money its value -- what makes it money.

Ken Houghton said...

Stewart, with due respects to Shag from Brookline, perpetuated the lie about "retire at 53 with an 80% pension"—twice, just so we knew his crack research team was doing crack instead of researching.

The good news is that everyone who has looked at the situation says most of those CDSes were written by US-based banks, so it appears the Fed will be printing a lot more money soon so that i/d/i/o/t/s/ economists can raise inflation fears even as "Excess" Reserves goes up another half-trillion or so (see the change from 1/2011 to 5/2011) in tribute to claiming that the "balance sheet recession" is now only a consumer problem.

Brenda Rosser said...

Re: "Brenda is talking like a Tea Bagger!!! "Let's blow it up and start all over again"!"

Somethings happen all by themselves. Ponzi capitalism creates its own inbuilt revolution.

"Jamie Galbraith and Randall Wray are correct in their analysis of money. They will realize that sovereignty is immune to bankruptcy in the sense that the term is employed in lay conversation. "

True. If it can print money then it can forestall civil uprising by hiding the steady erosion of the real economy for a while. Other nations, who abandoned their money-making abilities, are facing their 'overnight' demise. Abandonment of essential health care, withdrawal of pensions (in the context of a culture not yet adapted to the direct family support of their elderly) and loss of jobs when many millions have left the family farm.

This is the other form of bankruptcy.

TheTrucker said...

Sorry Brenda, but the people left the farms a long time ago at a time when there was a gold standard with which to contend. As to the capacity to address disasters caused by the private sector greed monsters, the USA has the capacity as does any other nation that is truly sovereign. What is missing is the knowledge of the populous regarding monetary economics and the religious affliction that prevails regarding the sanctity of money -- the religious notion that fiat money has some sort of intrinsic value in and of itself. It is a hold over from the labor invested in finding, mining, smelting gold and the casting into coin or bullion. And also the scarcity of the commodity. Fiat money has _NO_ intrinsic value in and of itself and the scarcity is controlled by the creator of the units of value and enforced by the reclamation of these units via taxation and other government mechanisms such as the rent of the commons or the fines visited upon those who have harmed the society. And it is these reclamations of the issued money that maintains the scarcity. When a government loses the ability to tax or to collect rents from its sovereign commons, the jig is up. Government dies except for the use of its power to enforce the contracts of the banksters that now are the only issuers of money.

Brenda Rosser said...

Re: "the people left the farms a long time ago at a time when there was a gold standard with which to contend...AND..."Fiat money has _NO_ intrinsic value in and of itself"

Gold doesn't have much intrinsic value either. The real 'currency' that resulted in people leaving farms (I understand) was the 'oil economy' and, among other things, the promise of an easier life from mass production and mass consumption.

There are actually plenty of avenues for bankruptcy within society. For example, when the cheap and plentiful energy basis of an industrial economy disappears and the mass population are still thinking in terms of their being consumers rather than producers. Or when paid work is unproductive etc.

TheTrucker said...

In reality based economics it is not possible for a sovereign nation to go bankrupt, Brenda. You may like using that word but it is already well defined as being something other than what you wish to describe. A government can be destroyed by its inability or unwillingness to tax. But that happens due to a debasement of the currency and not to any shortage of it. The United States can pay all its debts at all times because those debts are owed in the currency created by the US government (and its central bank -- the Fed).

If the US does not reclaim sufficient amounts of its "spent into existence" currency via taxation, or other means (rent collections, fines, tribute) then the currency will lose value. But that merely raises the dollar price of imports and resolves the trade deficit while putting a stop to belched out hydrocarbons.

That isn't what I would call bankruptcy.

Brenda Rosser said...

Re: "The United States can pay all its debts at all times because those debts are owed in the currency created by the US government (and its central bank -- the Fed)."

Yes. Some nations, however, like Greece and other members of the EU cannot print their own money to pay debt.

Re: "If the US does not reclaim sufficient amounts of its "spent into existence" currency via taxation, or other means (rent collections, fines, tribute) then the currency will lose value. But that merely raises the dollar price of imports and resolves the trade deficit while putting a stop to belched out hydrocarbons."

Not necessarily. This statement appears to assume that the US has sufficient infrastructure and natural resources to "resolve the trade deficit" in the instance of a dollar devaluation. It may take decades for the US to invest sufficiently to be able to do this. Meanwhile Americans would have to shift from a consumption-oriented lifestyle. Not an easy nor overnight thing. Crisis, IMHO, is the most likely outcome.