Tweet of the day - Garett Jones - "Bailouts: A transfer of wealth from firms that don't exist to firms that do exist."
Baseline Scenario - Eurozone bailout plan - "This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit. The Europeans promise to unveil a mechanism this week that will “prevent abuse” by borrowing countries, but it is hard to see how this would really work in Europe today.
As Willem Buiter (formerly Bank of England, now at Citigroup) remarked last week, you have the greatest incentive to default when you are running a balanced primary budget (i.e., after substantial budget cuts) and still have a large government debt outstanding. His point is that the incentive structure of these programs means they will postpone a decision to default which would otherwise be rational now. "
Jean-Claude Trichet, President of the ECB - Finance as a source of instability and economic regress - "When – and how – can finance turn into a source of instability and economic regress? My answer is simple. When [...] screening and monitoring services are neglected, and when risk management, liquidity transformation and price discovery are flawed.
Paradoxically, securitisation – a new technique to control risk – had made risk control practically impossible"
"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008