no comment.
banking.economics.sustainability and other shiny stuff
no comment.
From McSweeney's, In Which I Fix My Girlfriend's Grandparents' WiFi and Am Hailed as a Conquering Hero.
But then one gray morning did Internet Explorer 6 no longer load The Google. Refresh was clicked, again and again, but still did Internet Explorer 6 not load The Google. Perhaps The Google was broken, the people thought, but then The Yahoo too did not load. Nor did Hotmail. Nor USAToday.com. The land was thrown into panic. Internet Explorer 6 was minimized then maximized. The Compaq Presario was unplugged then plugged back in. The old mouse was brought out and plugged in beside the new mouse. Still, The Google did not load.
Perhaps more importantly, and at the risk of repeating myself, the downgrades increase the dependence of the big banks on finance from the European Central Bank – and for the economic recovery of the eurozone, that’s a very bad thing.
The less that banks are able to raise funds in a normal commercial way, the more they’re dependent on a central bank, the more reluctant they are to lend to the wider economy – and given the massive dependence of the eurozone economy on finance provided by banks, that leads to a reduction of economic activity, a reinforcement of recessionary conditions…
..the downgraded Italian and French governments would be seen to be less financially capable of bailing out Italian and French banks in a crisis, so other creditors would be shouldering more risk…
So even if the downgrades don’t lead to default by a nation or a bank, they make it much harder for the banks – and in a way the whole eurozone – to get off life support.
…That creates a damaging negative feedback loop (less lending means asset price falls, more bankruptcies, bigger losses for banks, and even less lending by capital-constrained banks) which makes it all the harder for the eurozone to break free of its cycle of decline.
And, as I said in my earlier note, the downgrades also make it harder for the eurozone to establish a proper circuit breaker – in the form of a giant bailout fund – to protect other sovereign creditors in the event that today’s impasse in Greek debt talks lead to a Greek default.
Here is a useful and only slightly overstated summary of where things stand:
The entire eurozone banking system can be seen to have been nationalised – or at least the funding of banks has been nationalised, even if their ownership hasn’t been transferred to taxpayers.
Suppose our minds have a hot state and a cool state. In the cool state we are rational and make calculated tradeoffs between immediate rewards and payoffs that require investment of time and effort. But when the hot state takes over we abandon deliberation and just react on instinct.
The hot state is there because there are circumstances where the stakes are too high and our calculations too slow or imperfect. You are being attacked by a hungry lion, the food in front of you smells funky, that bridge looks unstable. No matter how confident your cool head might be, the hot state grabs the wheel and forces you to do the safe thing. Suppose all of that is true. What does that mean when a situation looks borderline and you see that instincts haven't taken over? Your cool, calculating head rationally infers that this must be a safer situation than it would otherwise appear. And you are therefore inclined to take more risks. But then the hot state better step in on those borderline situations to stop you from taking those excessive risks. Except that now the borderline has moved a little bit toward the safe end. Now when the hot state doesn't take over it means its even more safe, etc. And of course there is the mirror image of this problem where the hot state takes over to make sure you take an urgent risk. A potential mate is in front of you but the encounter has questionable implications for the future and the potential consequences are incomputable as so far as within the current situation. Physical attraction receives a multiplier. If it is not overwhelming then all of the warning signs are magnified.
Happy new year.
