A Question of Balance, Part the Second

Every now and again, the mainstream pundits catch up with these endeavors. Not often enough, evidently. The major theme has evolved to: when the process under discussion obeys God's Law then data reflects an unbiased reality, if one is careful collecting the data, and can predict the future; but when the process is some Human Endeavor, data means little to decision making while motive and incentive drive these decisions; humans will change the data generation process sub-rosa (to those not in on the scam). The Housing Bubble happened because that Giant Pool of Money (still with us and growing) demanded a high-return, low-risk instrument, so mortgage companies (thence, not first, banks) found cracks in law and regulation which made creation of yet more and larger mortgages a fact. The data, price/income ratio, said this was stupid, but the motive and incentive was to ignore contrary evidence. And so it was. The Giant Pool was happy. Until it wasn't, but the smart money had already exited, so it didn't care.

What's been going on with the Euro follows much the same pattern. Adam Davidson brings forth some new reporting, which is required reading. Once again, the smart money followed motive and incentive, rather than data. The smart money made a bundle, then left the 99% holding the bag.

There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece's crisis as a moral failing on the part of the Greeks.

He goes on to provide a primer on how bonds are "sold", and it's important to understand this mechanism. The US Damn Gummint uses the same method. The interest paid on US bonds is not set by the Fed or Treasury, although perhaps by the Trilateral Commission (yes, it really exists, not merely a co-figment of left and right paranoia). Buyers of such instruments aren't also buying Savings Bonds. They're "sophisticated" investors, with lots of computers to decide what to pay.

So, Greece became a Euro country, and Germany had one more nation where it could export on a hard currency. And Germans won't stand for getting anything less than a full Euro; otherwise Europe with the Euro is just like Olde Europe where countries fiddle their currencies against predators like Germany. Can't have that. Exactly like our Red states with conscripted labor selling into Blue states, with (dwindling) middle class consumers. It will end just as badly, but with more bloodshed in all likelihood. As knuckleheads like Walker kill off his state's middle class, the Red states will find their Total Addressable Market shrink. And don't give me any crap about international exports. The bleating about the "strong dollar" killing profit increases in volume with each quarterly. And that's only the beginning. Just wait for countries explicitly devaluing. "The horror! The horror!"

Davidson brings up Bretton Woods, but you should do, at least, a Wiki journey to learn more if you can't do a five minute Toastmasters' on the topic.

Here's the punch line:

But the bailout broke this virtuous circle, signaling that the bond market would stay safe even when bond buyers were wildly reckless, pouring billions of dollars, for example, into risky subprime-mortgage bonds. The bailout represented a transfer of wealth from the rest of the economy into the bond market -- precisely the opposite of what is supposed to happen.

Ireland, earlier, sacrificed its citizens on the bank altar, so there's reason for Greek bondholders to demand the same.

The IMF said that as a result of the failure to impose losses on bank creditors, "many in Ireland question why Irish taxpayers should be the ones covering the cost of addressing such euro area-wide concerns. A bail-in or other solution that would have 'mutualised' these costs would likely have resulted in more equitable burden sharing."
...
Banks had extended credit heavily to property speculators during the latter stages of the Celtic Tiger economy, between about 2002 and 2006, but the sector collapsed when the global financial crisis hit in 2007 and 2008.

IOW, Ireland crashed, as did the USofA, on the backs of out of control banks. Somewhat different from Greece, certainly.

And, back to Greece.

The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble -- so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn't mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves.

So, in the end, what mattered to those buying in on GR0133004177 was motive (high-return at little risk) and incentive (failure would be paid by others), not data. As it always is in the venue of human processes.