Greece Has Chosen to Become a Banana Republic With its No Vote

It was an in-your-face message to the country’s creditors (largely the European Union, the European Central Bank and the International Monetary Fund) that Greece won’t be lectured on repaying debts or pension reform anymore. And it leaves the Troika with few options at tomorrow’s emergency summit—either cut Greece loose and accept the consequences, or give in to the country’s demands.

Not much of a choice, given that if the EU caves, it reads like an open invitation to countries like Cyprus, Portugal, Spain and Italy to do exactly what Greece has done. Since when is the Eurozone a transfer union? It cannot be expected to shift funds from high-productivity countries that keep their public finance in order to poorer ones that don’t. There’s a lesson to be learned here, lest the EU blows its chance.


go to Forbes.com

Greece Got Only Promises, No Money, from its Friend Mr. Putin

A victim of Putin’s typical negotiating tactics, Tsipras left St. Petersburg with an offer of money from a project that might never be completed. Yet Putin got what he wanted: Tsipras was on record as opposing the extension of EU sanctions against Russia.

go to Forbes.com

Someone Must Eventually Say No. Warnings on the Europe Crisis

Yesterday’s Wall Street rally was indicative of a world investment community desperate for a shred of good news. The U.S. employment figures were better than expected and a consortium of central banks, the Fed included, agreed to prop up European banks with temporary funding.

Everyone now knows the meaning of “moral hazard” – a term foreign to the business vocabulary twenty years ago. It first came to the fore with the Asian Crisis of the summer of 1997. Buyers of bonds of the emerging Asian economies, expecting a lender of last resort, sought to profit from high interest Asian bonds and fixed dollar exchange rates. The two most recent episodes of moral hazard are the U.S. mortgage disaster and the toxic debt of  Ireland, Greece, Portugal, and now Italy. In both cases, investments were made assuming a lender of last resort. Things are different from 1997: We have no credible lenders of last resort who can make whole creditors who stand to lose not billions but trillions.

Moral hazard and lenders of last resort are addictions. We realize their costs only after the fact, and then we must agree to yet another bailout. Otherwise the costs are too high.

We now stand at a watershed in Europe. Creditor countries and Eurocrats tell Germany, the European Central Bank, and the IMF that the costs of yet another bailout are small compared to the alternative. Apparently, the world’s central banks yesterday caved in, at least partially. Only the German voter and perhaps the European Central Bank are left standing against the bail-out consensus. It is argued that somehow the European Union needs time to discipline the spendthrift Greeks, Portuguese, and Italians. But the central bank signal to them is “continue as is. Pretend to change your ways. You are too big too fail, so don’t worry.”

Overlooked in all the confusion is that the central bank loans and European emergency funds are tiny compared to the total bailout costs. Sufficient funding can only be had if private lenders participate. But so far, there are no signs of interest on their part. A more likely result is that private speculators will test the resolve of European governments and central banks to back toxic debt.

Once Soros and others enter the ring, my bets are on the private speculators. Taxpayers around the globe will pay dearly, and we will learn again that moral hazard has substantial costs. We will then immediately forget this lesson until the next catastrophe.

Obama does not understand adverse selection

We economists discovered moral hazard and adverse selection in the mid-1980s. These terms came to us from the insurance industry and fit in well with our growing interest in information economics.
Of the two concepts, moral hazard has gotten more play than adverse selection. “Moral hazard” is a term used frequently in the business press. It explains current and past financial crises by showing that bad things happen when investors expect bailouts by lenders of last resort. The Southern European countries expect bailouts from their northern neighbors. Private mortgage lenders expect automatic bailouts from Freddie and Fannie. Buyers of Asian sovereign debt in the 1990s expected international agencies to bail out the lending countries.
Obamacare has brought adverse selection to the forefront. It explains and will continue to explain why Obamacare will not work. Adverse selection is routinely taught in law schools. I would imagine that President Obama encountered it in the course of his law training.

Read more: http://dailycaller.com/2011/10/20/obama-does-not-understand-adverse-selection/#ixzz1bOmbIESh