Atlas Shrugged: The Mocking

Wednesday, December 7, 2011

The House Always Wins

Shorter Megan McArdle: It is with deep and abiding regret that I say that banks that make bad loans in Europe must never lose money or the poor will suffer.

Long version:

We can agree at the injustice of transferring money from moderate-income pensioners to wealthy bondholders. But I think the even more important question is what makes the average Joe better off. And it's not clear to me that "stiffing the creditors" is the right answer.

For starters, some of those creditors--maybe a lot of those creditors, depending on the country--are insurance companies and pension funds that serve the aforementioned Average Joes. But leave that aside. Europe is not, at least as I understand it, making the creditors whole because of their abiding love for foreign holders of European sovereign debt. They're stepping in and guaranteeing this debt in order to prevent a run on their banks and their bond markets.

Runs on financial markets, as far as I can tell, do not righteously limit their damage to rich jerks who didn't need the money anyway. In fact, the people who suffer the worst from a rapid contraction of the credit markets are the poor. They're the ones who actually end up hungry and on the street when companies start failing and they can't get jobs.

Now, perhaps you think that Iceland proves that default works. But I think that even the serious proponents of this idea recognize that this is a contested notion which is far from bulletproof. Ireland might be doing better now if they'd just told the bank creditors go go get stuffed. They also might be in much worse shape. We don't have a whole lot of data points here.

In the case of the current eurodeal, it seems to me that announcing that debtors are getting haircuts on their Italian or Spanish sovereign debt--or even failing to convincingly close off that possibility--would create the very outcome that they're trying to prevent: an all-out run on a bond market that is too big to save, and a follow-on collapse of banks that have bought too much Italian or Spanish debt.

Maybe this would be the best thing in the long run. But when I think about the histories of the Great Depression I've read, I have to say that it's certainly not obvious to me that making the creditors eat their losses is the safest and best options.

But even stipulating that it is, you can certainly see why the governments in question are frightened of the immediate consequences--and why they might try to stave them off, even at great expense.

Don't get me wrong--I think this is a pretty bad plan. But I'm not actually sure Europe has any obviously better plans left open to them.

This is why McArdle claimed that defaulting didn't help Argentina: Banks that make bad loans must always be made good. Moral hazard, like taxes, is for the little people.

8 comments:

ifthethunderdontgetya™³²®© said...

Moral hazard, like taxes, is for the little people.

That's that both our political parties say, as well as our President.
~

Downpuppy said...

The confusion between sovereign debt, which is governmental obligations, and bank bailouts is overwhelming.

KWillow said...

...it's certainly not obvious (to me) that making the creditors eat their losses is the safest and best options.

ArgleBargle is a truly dumb person who learned a lot of big words (female Newt), but it ought to be clear to even her that illegality & villainy are supposed to be punished,not rewarded.

But even stipulating that it is, you can certainly see why the governments in question are frightened of the immediate consequences...

Among other things, our politicians are unable to think "long term", as are our corporations. The next election/next quarter's profits is as far as they care to visualize.

Anonymous said...

I am shocked (shocked!) that she came to that conclusion. Especially after such a careful and considered analysis.

Anonymous said...

We can agree at?

Srsly, that's what she wrote?

Ken Houghton said...

"Now, perhaps you think that Iceland proves that default works. But I think that even the serious proponents of this idea recognize that this is a contested notion which is far from bulletproof."

Maybe not bulletproof, but certainly healthier than the walking wounded.

But why would we let facts interfere?

"Ireland might be doing better now if they'd just told the bank creditors go go get stuffed. They also might be in much worse shape. We don't have a whole lot of data points here."

Let's go to the pictures. Oops, still worse off than Iceland. Not to mention that 14% unemployment rate. Headline, not the deeper details.

But it could be worse, because McMegan doesn't "have a whole lot of data points."

"In the case of the current eurodeal, it seems to me that announcing that debtors are getting haircuts on their Italian or Spanish sovereign debt--or even failing to convincingly close off that possibility--would create the very outcome that they're trying to prevent: an all-out run on a bond market that is too big to save..."

If bond market participants are too stupid to know their bonds aren't worth par, they shouldn't be in the bond market in the first place. Oh, wait, they do know that. (Higher yield than in August = lower price now.) I guess Bloomberg's generic yields are just too difficult for a Senior Business and Economics Editor to understand.

"...and a follow-on collapse of banks that have bought too much Italian or Spanish debt."

Uh, that would be the German banks that got subsidized by the Merkel Reich to the tune of 5% of the country's GDP—more than the U.S. "stimulus," more even than China's Massive Infusion of Cash that has them worried they've caused Too Much Growth. (Such problems.)

You might wonder why the Germans thought they needed to recapitalize their banks. After all, there wasn't a property bubble in Germany, the way there was in Spain and Ireland, nor do they have a tradition of tax evasion among the Very Rich, the way Greece and Italy do. And certainly Germans a Very Prudent People, especially in their Lending Practices; they tell us so every day.

Surely they weren't recapitalizing because German banks hold too much Greece, Italian, Spanish, and Irish debt that will have to take a haircut. There must be a better reason...

Anonymous said...

Given all the hedging, the it's-not-clear-to-me-thats, and the willful ignorance of date, I'd have to amend the shorter.

Shorter Megan McArdle: Just you think about some bad things that could happen to you personally.

Ben said...

God dammit. I hate when pundits do this.

"We have to do this awful thing to poor people, because the alternative would be worse for everybody"

No, it won't be worse for everybody; it'll be worse for you, and the people you shill for.

The poor are already getting shat on. If you're unemployed, you can't lose the jobs you don't have. You can't lose the benefits you've already forfeited. The parade of horribles McPinksalt warns might come is already marching down the street. It's already happening. And will continue to happen, since more bailouts will be used to justify even more cutbacks.

It's just so fucking offensive, using concern for the poor to justify pissing in their faces. I can't even . . . It's everywhere, too. The Economist (which big surprise McAntoinette worked for) is famous for clamoring for Europe to liberalize their internal labor markets, and always throws in "it'll help the working man" as a justification. "We'd like to import a whole mess of Romanians to do your job for a tenth of the wage because we care about your well-being."

Christ. Sometimes I feel like there's a galactic civilization somewhere that knows all about us and chooses not to make contact out of disgust. Sometimes I hope there's one. I don't know which is worse.