The Banker has an excellent article on this in their Bank Trends section. A picture speaks a thousand words!
If you look at the dynamic of the crisis to date you see the following flow (broadly but not exactly)
1. Sub-prime mortgages in the USA started to go under 2. Interbank lending froze as banks liabilities were unknown & collateral was of unknown quality 3. Interbank rates shot up 4. The crisis was not contained, culminating in the fall of Lehman which triggered a series of world events the most substantial aspect of which was a loss in confidence. 5. Markets fell rates were dropped to record lows in the EU, USA and Britain. 6. Recovery began with several bailouts in the majority of nations affected.
7. This is critical – bank and private debt effectively became public debt, in Ireland’s example this was via our banks, in other countries it was in the same manner or via quantitative easing. Across Europe the ECB was a key facilitator of liquidity.
The debt has now, in many countries become a public debt issue, in Europe specifically it is a Sovereign debt issue, the like of which the US …
We hear about Debt/GDP all the time (national debt/Gross Domestic Product; total output of the economy) and the standard argument is that we should be looking at Debt/GNP (national debt/Gross National Product; GNP strips out non-Irish domiciled output – what remains here).
The question should perhaps not be ‘which is better Debt/GDP or Debt/GNP’ it should be is ‘Debt/G-anything’ the relevant metric? There are a few reason for why GNP and GDP are both lacking, in fact it distorts a true view of our Deficit
1. It’s a thing of the past – both examples are historical by nature, they change and that is why any conversation on GDP and GNP is a constantly movable feast. Imagine if I asked you to drive across the country and describe the scenery to me, but you could only do so by telling me what you saw in the rear-view mirror? That is what GDP & GNP are about. Debt/GDP levels in Europe soared after …
One of my favourite firms is Institutional Risk Analytics who study banks and rate their risk. Chris Whalen of that firm is in the clip below, he recently wrote a book called ‘Inflated’ and I hope to review that on this site and elsewhere in the future. IRA are widely acknowledged as one of the best bank analyst houses in the USA.
Primetime looked at the property market news of a 40% drop in prices from peak to date and after the package piece they had an ‘in studio’ piece. The debate centred around property and mortgages as well as some of the issues regarding negative equity.
This is a compelling talk by Nouriel Roubini, he talks about the way that financial crises are predictable, and that they don’t come out of nowhere, rather they are the rational conclusion of the factors that combine to lead up to it. A great video and well worth watching.
Nassim Taleb says in this interview that the debt problems of 2010 are worse than those of 2008, he has re-released his now famous book ‘Black Swan’, and his core belief presently is that recession is not the issue, debt is the issue. Fragility is exacerbated by high levels of debt – we can see that from an Irish context on Sovereign Debt/Bank Debt (whether the problem is real or perceived).
One of the most poignant things Taleb talks about is the failure of stimulus, and he rightly points out that Greece is not being asked to ‘stimulate’ their way out of their debt issues, they are being asked to look for austerity solutions, perhaps Keynesian beliefs might be shunted once again into history?
The point holds true in our opinion, high levels of debt are a wealth destroyer and inhibitor to prosperity, the drag on economies, in particular our own, will be evident for many years to come.
Tom Keene, editor at large in Bloomberg has given an interesting interview, talking about Japan and how they are witnessing a sea of change in their economic dynamics, he says there is a ‘flight to dollar’ which is reflective of a ‘flight to quality’. However, with all the lending the USA will require in order to finance their stimulus plan the question is this: will the flight to quality fill the bond orders required? And even if it does, how will the USA pay it all back? Questions worth pondering
I have been nominated for an Irish Internet Association net-visionary award as best business blogger [God: the irony in your humour is noted]. I guess the lonesome path of reading and then interpreting and writing endless financial stuff is not just a cure for insomnia, it is also a route to recognition, and frankly I’m really chuffed. I had a look at the competition and was even more impressed – have a look at who I’m gonna get whooped by.
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Spicendipity: A blog about food – who can say they wouldn’t love this one? I’ll be checking back here regularly! The way to win a mans heart is through his …