Tags: Stiglitz | Ross | financial | crisis

Layers and Players — Financial Storm Brewing

By    |   Monday, 26 Jan 2015 10:40 AM

While the Northeast braces for a massive nor'easter and the public debate remains focused on the inflation of footballs, the meteorology of the ongoing, permanent financial crisis is becoming ever more complicated. Over the weekend, the Greeks elected a left-wing government that has the makings of a Brown-Vitter coalition that will resist the further institutionalization of bailouts.

On CNBC Monday morning, Nobel laureate Joseph Stiglitz singled out the Germans as the greatest beneficiary of the struggling eurozone, arguing that they have been even more aggressive than the Chinese have in building up a large balance of payments surplus thanks to an undervalued currency, the euro being chronically weaker than the mark would be on its own. Stiglitz suggested that perhaps it should be Germany that leaves the euro rather than Greece. The U.K. certainly looks wise for having stayed out.

This writer wonders how much the Draghi plan finally announced by the European Central Bank last week ultimately relies on the Yellen put. The Federal Reserve holds its own meeting this week and will reiterate its determination to be patient in carrying out its declared intention to raise interest rates. This writer has always doubted that the Fed would actually withdraw its support from the economy as Wall Street and other constituencies have become more comfortable with quantitative easing as just another entitlement program. The collapse in oil prices and the apparently unforeseen revaluation of the Swiss franc could help to justify continued caution on the part of the Fed, but if it had not been for these events, it would have been something else.

Stiglitz was followed by famed investor Wilbur Ross, who, perhaps unintentionally, provided another example of how another Buffett/Minsky moment could occur. Readers will recall that at this is a moment when the tide goes out and some investors are revealed to be wearing nothing but the federal safety net. In recent times these moments are often followed by government bailouts, because the thinkers who have provided the intellectual support for them to hold stubbornly to the view that nothing happens in the economy that can't be made just a little better by more Treasury and Fed intervention that incidentally, regrettably, happens to benefit clients.

Ross told host Joe Kernen that the oil price will turn around sometime late in 2016 and that this will create a buying opportunity in the "busted bonds" of smaller exploration and oil service companies. In explaining this he pointed out that the bonds are revalued by banks twice a year, in April and October. These valuation inflection points hold potential opportunities. Ross opined that the bonds will hold little peril at the time of this April's valuation, but the October valuation could be "the bigger hurdle."

For aficionados of the financial crisis, this scenario raises all sorts of policy questions about who, unlike Ross, will end up on the wrong side of this trade and have to be bailed out, first by regulatory forbearance and perhaps later by actual purchases of the bonds by the authorities.

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Robert-Feinberg
While the Northeast braces for a massive nor'easter and the public debate remains focused on the inflation of footballs, the meteorology of the ongoing, permanent financial crisis is becoming ever more complicated.
Stiglitz, Ross, financial, crisis
506
2015-40-26
Monday, 26 Jan 2015 10:40 AM
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