Monday, November 7, 2011

Sacrificial Souvlakia

I don't go in much for analogies or metaphors. They're usually poorly constructed, involve things that are non-analogous, and are designed to sway the most shallow of thinkers. Often, in the context of political/economic discussions, people use these constructs as if they were actual evidence, when--even if done right--they can never be such a thing. Consider the the "car in a ditch" metaphor employed by President Obama. Or the "credit card debt/sovereign debt" analogy employed by tea party types (and others) in arguing against raising the debt ceiling.

In the case of the former, it's nothing but sloganeering; the US economy is not a car and it was not/is not driven by a single person or political party. In the case of the latter, while the analogy does help some understand the idea of a national debt, the analogy ultimately fails, since mechanisms for monetary policy are far different for a government.

That said, I can't help but see some similarities between the current situation in the EU and the financial meltdown in the US from a few years back.

The EU--composed of a number of distinct entities (countries)--is looking at a potential economic collapse of massive proportions, as each entity grapples with its own failings and debts. Some of these entities are much closer to failing than others, like Greece and Italy. And they are in this position because they have been spending wildly. But they've been using other peoples' monies.

Now, it looks likely that the Greek government will fall, the EU will wipe out much of the Greek debt, and subject Greece to severe austerity measures. It's almost like the country is being put into receivership. Italy is in the much the same position as Greece. But it is much, much larger and was able to maintain an illusion of fiscal stability a little bit longer than Greece.

Think back to the early days of the financial meltdown in 2007. As William Cohan details in his book--House of Cards--Bear Stearns was on the leading edge of it all, but was not alone. The New York Fed essentially allowed Bear Stearns to go under, even as it created a means to prop up Lehman Brothers for a short time. The long and short of it: Bear Stearns principals and investors got creamed, Lehman Brothers principals and investors fared much better (though not great). And just over the horizon, Goldman Sachs, J.P Morgan Chase, and Bank of America were insulated from the most catastrophic possibilities.

I'm thinking George Papandreou should take up bridge. And maybe he can share some of his best lamb recipes with Jimmy Cayne, in exchange for some lessons...

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