The fragile side of globalization
Look at the parallels between today and 2007.
In 2007 it was generally accepted knowlege that approximately $2 billion of sub-prime mortgage loans were in serious trouble. That was alarming, but $2 billion was only a fraction of the overall mortgage market. It looked like some companies and investors would take some hits, but nothing was viewed as calamatous.
What wasn't generally known was that credit default swaps of 60 times that amount had been written against the securitizations holding these trash mortgages. The concern mounted and moved into the so-called Alt-A mortgage market, a step above sub-prime. Then the construction market stalled, new buyers vanished, new financings stopped, and much of the prime mortgage market became suspect as well.
Mortgage securitizations that had been sold broadly, to everyone from supposedly sophisticated global institutions to clueless U.S. retail investors, became toxic and subject to the attacks of the bond vultures. Employment suffered, consumers pulled back, Lehman, Bear, and Wamu were overexposed and collapsed, and without the uninformed largesse of Wachovia and Bank of America, Golden West and Countrywide would have gone down as well. Global credit markets nearly froze up, and a serious recession was underway.
The point is that what looked like a small containable event at the outset ballooned into a massive economic disaster from which no one can say that we have even yet recovered from.
Looking at today, in 2010 it became apparent that a small country of seaside resorts and historical monuments had debts beyond its capacity to repay. Greece has almost no real industry other than tourism, olive oil, a large shipping industry that has much of its wealth offshore, and goods that are mainly for domestic tastes and consumption like ouzo and retsina. The country also has a tradition of tax evasion, patronage, and restrictive work rules that would be viewed as corruption in many countries but is almost a source of pride there. It's part of the culture.
Due to its inclusion in Euroland the country was able to issue debt in amounts that would never have been possible had the drachma still been its currency. And almost amazingly, many banks and institutions did not look through the facade of the Euro and funded huge amounts of debt to support Greek profligacy.
But as in 2007, this is one small country in a prosperous Europe. With some work, shouldn't it be containable. And as in 2007-2008, the answer is no. With one crack in the wall, little Iceland imploded, Irish banks were unmasked as completely irresponsible real estate lenders, seemingly viable Portugal became a bond vulture target, and even Spain and Italy, real important members of Euroland, are now under pressure.
Having a region as important as Europe under financial stress has impacted the rest of the world. Brazil growth retracted 27% in the most recent period, India's growth is slowing, and China is under pressure on several fronts being lower exports and more pressure by workers for better treatment and wages.
U.S. commentators constantly mention Europe as the drag on our economy, but any idiot knows that is only one piece of the puzzle. Political gridlock could be a polite term to describe the approach of Congress to unemployment and economic slowdown, and an insular xenophobic idiocy could be another way of saying it. The U.S. Congress is incapable, mentally and culturally, of looking constructively beyond its borders. They seem to be blind to the fact that the political dysfunction in the world's largest economy undermines confidence in the rest of the world.
So for now, little wonderfully attractive tourist destination Greece, a small fraction of the global economy, has set in motion a chain reaction of events that threaten a global recession. In 2007 it was a minor subset of the U.S. mortgage market that did the trick. In 2011 we are retracing the momentum of a seemingly small problem becoming a global phenomenom.
We can only hope that lessons learned from 2008 and 2009 are somehow remembered despite the challenges in Europe and the rigidity of U.S. politics such that a collapse of liquidity is avoided and potentially viable countries don't lose any sense of political control.
What's the bright side of all this. Every day brings interesting news. Watching investments eliminates too much watching television or reading crime novels. Wealth is being diminished and portfolio allocations are changing automatically. It's an unnerving time, but maybe for those with balanced portfolios and some savings it's a time to appreciate what we do have - and of course look for opportunities that become absurdly oversold.
In 2007 it was generally accepted knowlege that approximately $2 billion of sub-prime mortgage loans were in serious trouble. That was alarming, but $2 billion was only a fraction of the overall mortgage market. It looked like some companies and investors would take some hits, but nothing was viewed as calamatous.
What wasn't generally known was that credit default swaps of 60 times that amount had been written against the securitizations holding these trash mortgages. The concern mounted and moved into the so-called Alt-A mortgage market, a step above sub-prime. Then the construction market stalled, new buyers vanished, new financings stopped, and much of the prime mortgage market became suspect as well.
Mortgage securitizations that had been sold broadly, to everyone from supposedly sophisticated global institutions to clueless U.S. retail investors, became toxic and subject to the attacks of the bond vultures. Employment suffered, consumers pulled back, Lehman, Bear, and Wamu were overexposed and collapsed, and without the uninformed largesse of Wachovia and Bank of America, Golden West and Countrywide would have gone down as well. Global credit markets nearly froze up, and a serious recession was underway.
The point is that what looked like a small containable event at the outset ballooned into a massive economic disaster from which no one can say that we have even yet recovered from.
Looking at today, in 2010 it became apparent that a small country of seaside resorts and historical monuments had debts beyond its capacity to repay. Greece has almost no real industry other than tourism, olive oil, a large shipping industry that has much of its wealth offshore, and goods that are mainly for domestic tastes and consumption like ouzo and retsina. The country also has a tradition of tax evasion, patronage, and restrictive work rules that would be viewed as corruption in many countries but is almost a source of pride there. It's part of the culture.
Due to its inclusion in Euroland the country was able to issue debt in amounts that would never have been possible had the drachma still been its currency. And almost amazingly, many banks and institutions did not look through the facade of the Euro and funded huge amounts of debt to support Greek profligacy.
But as in 2007, this is one small country in a prosperous Europe. With some work, shouldn't it be containable. And as in 2007-2008, the answer is no. With one crack in the wall, little Iceland imploded, Irish banks were unmasked as completely irresponsible real estate lenders, seemingly viable Portugal became a bond vulture target, and even Spain and Italy, real important members of Euroland, are now under pressure.
Having a region as important as Europe under financial stress has impacted the rest of the world. Brazil growth retracted 27% in the most recent period, India's growth is slowing, and China is under pressure on several fronts being lower exports and more pressure by workers for better treatment and wages.
U.S. commentators constantly mention Europe as the drag on our economy, but any idiot knows that is only one piece of the puzzle. Political gridlock could be a polite term to describe the approach of Congress to unemployment and economic slowdown, and an insular xenophobic idiocy could be another way of saying it. The U.S. Congress is incapable, mentally and culturally, of looking constructively beyond its borders. They seem to be blind to the fact that the political dysfunction in the world's largest economy undermines confidence in the rest of the world.
So for now, little wonderfully attractive tourist destination Greece, a small fraction of the global economy, has set in motion a chain reaction of events that threaten a global recession. In 2007 it was a minor subset of the U.S. mortgage market that did the trick. In 2011 we are retracing the momentum of a seemingly small problem becoming a global phenomenom.
We can only hope that lessons learned from 2008 and 2009 are somehow remembered despite the challenges in Europe and the rigidity of U.S. politics such that a collapse of liquidity is avoided and potentially viable countries don't lose any sense of political control.
What's the bright side of all this. Every day brings interesting news. Watching investments eliminates too much watching television or reading crime novels. Wealth is being diminished and portfolio allocations are changing automatically. It's an unnerving time, but maybe for those with balanced portfolios and some savings it's a time to appreciate what we do have - and of course look for opportunities that become absurdly oversold.
posted by John Borden at 1:22 PM
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