Posted tagged ‘Finance’

Some Damn Foolish Thing In The Balkans

June 4, 2015

It’s getting interesting* down Athens’ way:

ATHENS — Greece on Thursday told the International Monetary Fund it would not make a $335 million payment due Friday, taking a little-used option to defer that payment and three others until the end of the month.

Coming amid tense debt negotiations with the I.M.F. and European creditors, Greece’s decision holds political and financial-market implications that are hard to predict.

There’s a historical resonance sounding in the brinksmanship going on here.  This isn’t just a matter of debt and punishment.  What’s at stake may extend as far as the post-war and then the post-Cold War idea of Europe.  That would be the one intended to prevent even catastrophically incompetent or indifferent rulers from lurching into any replay of the summer of 1914.

Ludwig_Koch_Die_verbündeten_Monarchen_1915

Here’s Krugthulu, just as worried as I am — and way better informed:**

There’s an odd summer-of-1914 feel to the current state of the Greek crisis. While some of the main players are, rightly, desperate to find a way to head off Grexit and all it entails, others – on the creditor as well as the debtor side — seem not just resigned to collapse but almost as if they’re welcoming the prospect, the way, a century ago, far too many Europeans actually seemed to welcome the end of messy, frustrating diplomacy and the coming of open war.

The most troubling sign to me is the persistence of the disbelief on the part of international elites/opinion shapers that the Greeks might actually bolt from the Euro.  Never mind the risk to  the various institutional ties that are supposed to hold Europe together in a way that bars future conflict, armed and otherwise.  The idea that someone in a dispute might do something you don’t like seems just too difficult to accept on the part of Greece’s negotiating adversaries.

But there is real hardship in Greece right now, and there has been for years.  Political imperatives matter too:  the Greek government is new, left-leaning, and in power because they explicitly promised not to make deals that would satisfy Germany at the expense of the Hellene in the street.  There really is no guarantee — and lots of reasons to believe the reverse — that this one little, broke country will actually do the bidding of its would be financial masters — and yet even the slightest sign that such resistance is real evokes a kind of bemused wonder.

You can see something of the cognitive dissonance even in the brief “breaking” story in the Times linked above:

Although the practice of bundling I.M.F. loan payments into a single sum during a calendar month is allowed under the fund’s rules, the last time that option was taken was by Zambia in the 1970s.

I’m sure there’s a kinder way of reading that sentence, but it hits my ear as “Greece has the right to do this, but they shouldn’t.”  Unwritten rules, old boy.  Unwritten rules.

I’m with Krugman:  whether or not Greece would be better off or not dumping the Euro, Europe and the world gain an enormous amount from financial stability — which would be badly shaken if it looked like Euro-troubles were about to overtake the currency union.  In other words, it looks to me like Europe (even Germany!) needs Greece at this moment at least as much as Athens needs Brussels.

But what do I know:  I once vowed as a blogger not to behave like a pundit, which is to say, to bloviate about stuff I know only superficially and at second hand.  One thing I do know about, though, and have written on, is World War One.  No one’s mobilizing at this moment, and historical analogies are always fraught on so many levels.  But still, the insouciance, the lack of imagination about consequences — that was overwhelming then.  I smell it thickening in the air now.  That’s not good.

*As in, “May you live in interesting times.”

**This was written last Friday, which is to say before this latest news dropped.

Image:  Ludwig Koch, The allied monarchs and their field-marshals in the First World War (Kaiser Wilhelm II of the German Empire with Austria’s Franz Joseph)  c. 1915

Advertisements

Isaac Newton vs. Paul Ryan…

October 11, 2012

…who you gonna trust?

Paul Ryan on credit, debt and the wealth of nations:

You can’t spend, tax, regulate and borrow your way to prosperity.

[Tweet by @PaulRyanVP (little ahead of yourself there fella, wouldn’t you say? –ed.) at 11:40 on Wed. 10 Oct.]

Or — perhaps you can.

Isaac Newton:

If interest be not yet low enough for the advantage of trade and designs of setting the poor on work…as divers understanding men think it is not…the only proper way to lower it is more paper credit till by trading and business we can get more money.” (Italics added. Any invidious shadow that might fall upon the aspirant to the Vice Presidency is wholly intended.)

[Newton to John Pollexfen, MP and member of the Board of Trade, 1700.¹]*

In fact, of course, modern capitalism, the rise to power and great wealth of first Britain, and then ourselves and an increasing proportion of humanity, turns on the creation of credit, the ability of nations and individuals to borrow today against tomorrow’s increase in capacity, invention, and comfort.  It is precisely by paying Tuesday for the (means of making) hamburgers today that the whole system works.  If Paul Ryan and Mitt Romney have their way, we will slow our growth as a nation and as individuals, families, circles of friends will  suffer the consequences in diminished lives and opportunities.  (That such loss would fall  more on the mass of us than on those who recline at ease in Mr. Romney’s tax bracket is, of course, something that Adam Smith understood very well too — but that discussion is for another post.)

And if you don’t believe me? Take it up with my man Izzy:

But be careful — he really was a tad smarter than young Paul.

¹quoted in G. Findlay Shirras and J. H. Craig, “Sir Isaac Newton and the Currency” The Economic Journal, Vol. 55, No. 218/219 (Jun.-Sep., 1945) pp. 230-231.

*I’d be failing my Galtian duty as a profit maximizer if I didn’t mention that I discuss Newton’s role in coming up with new conceptions of money in my book Newton and the Counterfeiter, available at Amazon and wherever books are sold (also as an audiobook, where my sales are, alas languishing).

Images:  Marinus van Reymerswale, The Money Changer and his Wife, 1541.

Sir Godfrey Kneller, Portrait of Isaac Newton, 1689.

Wednesday Isaac Newton Blogging: The (Very) Deep Roots of the Banking Crisis.

October 1, 2008

Coming up next June, I’ll be publishing my book, Newton and the Counterfeiter, in which I tell the story of Newton’s mostly unknown career as a criminal investigator and death penalty prosecutor.

It is as well a story that touches on the birth of the modern financial system — it covers the period when things like the Bank of  England, fractional reserve banking, a variety of paper instruments, debt-for equity swaps (a little later, actually) and other such esoterica were all being tried out.

Of great importance was the development of a bunch of different approaches to financing government expenditure.  All kinds of things got a work out. The book deals with some of them, including a marvelous chimera of an instrument that was at once a lottery ticket, paper money, and a bond.  Weird — but creditors of the Royal Navy, among others, were compelled to accept the notes at par.

Unsurprisingly, some writers on what was yet to be called the discipline of political economy had grave doubts about the transformation of money into paper, and government resources from receipts into debt.  They raised questions.  And on at least one occasion, Newton answered them.

In 1700, Newton, then Master of the Mint, got into a dispute with John Pollexfen, a member of parliament and a founding member of the Board of Trade (with Newton’s friend and admirer, the philosopher and theorist of money, John Locke).

Pollexfen was a hard money guy — paper might have some use in the financial system, but everyone knew real money took the form of silver and gold coins.

He argued that use of paper instruments depended on the money being held to support it.  Not for him was this new fangled notion of fractional reserve banking:  an institution issuing a note had to have the denominated amount in coin to back up the piece of paper that claimed to be money.  That is: paper was a convenient method of signifying the existence of an amount of real money; it was not money in and of itself.

Newton disagreed.  His handwritten draft of a reply to Pollexfen survives in his Mint papers, and in that draft he wrote that creation of paper instruments — including those issued by the government as debt — was essential to ensure that the nation’s economy did not collapse for want of an adequate money supply.  He wrote “If interest be not yet low enough for the advantage of trade and designs of setting the poor on work…the only proper way to lower it si more paper and credit till trading and business we can get more money.”

Interesting ideas, no?  Increase the money supply to lower the price of money, the interest rate, and thus enhance trade and employment.  What a notion!

The other Newton comment that I know of on the question of whether government debt instruments were a good idea is even more striking.  He wrote in a different context on the question of whether the creation of government debt instruments were inherently damaging to government finance and the economy that, in fact, credit was supremely useful because,

“Tis mere opinion that sets a value upon money [coined precious metal]…and the same opinion sets a value upon paper security…All the difference is …that the value of the former is more universal than the latter.”

Mere opinion!  This was a radical idea indeed at the turn of the eighteenth century

Newton did allow that credit was like doctor’s physic.  To a certain dose it was helpful; to excess it could be deadly… a sentiment which also has strangely contemporary echo.

None of this to say that Newton was anything like a pioneer of economic thought; he was not.  Most of his views represented variations on contemporary elite opinion — which was struggling to come to grips with a transformation in finance that accompanied the global expansion of English and European trade and economic life.

But even here there are parallels.  Much of our problem today derives from the toxic consequences of exotic variations on older financial tricks, some of which do in fact have roots that stretch back, through several removes, to this beginning.  Now, as then, the failure of many to grasp the implications, the risks, associated with such innovation presented opportunities both legal and definitely criminal.  Even the smartest were not immune to the lure of occult, effortlessly acquirable wealth…

…and not even Isaac Newton himself avoided the infection, as will be discussed in another post, soon.

(See G. Findlay Shirras and J.H. Craig’s article “Sir Isaac Newton and the Currency” in The Economic Journal, Vol. 55, No. 218/219 Jun – Sep. 1945 for a fuller account of Newton’s involvement in the currency/credit issues of his day).

(Also:  I can’t tell you what a pleasure it was to take a brief break and write about something that doesn’t have to do with either of the those-who-must-not-be-named who have been bedevilling my concentration these last too-many days.)

Image:  Augustus Pugin and Thomas Rowlandson, “The Great Hall of the Bank of England,” in Ackermann’s Microcosm of London (1808-11).  (Anachronistic, I know — but what a nice image.)  Source:  Wikimedia Commons.

Financial Disaster: The Musical

September 22, 2008

I don’t have a lot of useful stuff to say about the current financial crisis (except that no one should be surprised what happens when you combine leverage, financial engineering, a familiar mania, and a near complete failure  in the assesment of moral hazard; it’s happened before, and it will happen again.)

Lots of folks who blog, and are therefore self-appointed founts of opinion, have similar problems.  Some have turned to that which soothes the savage beast to try and account for the seemingly sudden evaporation of something on the order of five percent of our GDP in one week.

I thought I’d do the same, but I’m not subtle like the likes of Ta-Nehisi Coates.  I think Woody nailed it a long time ago:  bad guys steal your wallet; really bad guys strip you down to scorched earth.  To put it another way, I think this song expresses the reason I do not want to let the Bush Administration loose with any fountain pen.

Enjoy:

Image:  Currier and Ives, 1875.  Source:  Wikimedia Commons.

Quicky AIG thought

September 17, 2008

I have even less of a reason to post about AIG than most of the blogosphere, having spent no time studying the insurance business, the interpenetration of insurance with the rest of the financial world or any of that.  But stimulated by this post, (h/t a nervous making post from Bainbridge), I’ve decided to shoot my mouth off anyway.  What else is having a blog for, anyway?

In my defense, I have read with pleasure the foundational paper in the history of the life insurance business,  Edmund Halley’s — yup, that Halley, the comet fellow —  “An estimate of the mortality of mankind, drawn for curious tables of the births and funerals at the city of Breslaw; with an attempt to ascertain the price of annuities upon lives, by Mr. E. Halley, R.S.S.”

I also have read these — probably more on point.  Warren Buffet knows just a little about insurance, and I cannot recommend too highly browsing through his letters to shareholders over the last several years at least.

The reason to look at Buffet’s letters in this context is that like AIG, Berkshire Hathaway is a huge player in the reinsurance market, and Buffet was, if not nearly undone, certainly hammered by a miscalculation, or misunderstanding (stub only) on purchase, of the reinsurance exposure of General Re, bought by Berkshire Hathaway in 1998 — not to mention the prospect of outright fraud at the company (in a transaction involving AIG, btw).

As I say, BRK trembled a bit but did not fall on that miscalculation.  Similarly, if AIG’s risk management turns out to be as bad or worse as General Re’s, the US treasury will take the hit, and I’m reasonably sure that we the taxpayers and citizens of the US will feel some pain — but not a mortal wound.  The question, unanswerable on its face, is whether the risk of the range of possible outcomes in the US purchase of AIG is worth accepting in the face of the risks of the damage an AIG failure would do in the here and now.

But that still leaves me wondering:  are Mssrs. Paulson, Bernanke et. al smarter than Warren Buffet?

Now that one leaves me a little nervous.

(full disclosure — I own the tiniest bit of BRK stock, if anyone cares.  I certainly don’t have enough to have Warren’s phone number, if that’s what you are asking.)