Monday, 13 April 2009

Underwriting systemic failure - not likely to get cheaper in the future

We are not even able to determine the magnitude of the damage done by the most recent debacles and that is after several months of intense scrutiny (just how transparent that process has been is open to debate). The recovery plans call for trillion dollar public deficits in the US for years to come and that is based on benign assumptions about long term interest rates and not factoring in any major "dislocation" in the Treasury bond markets in future budgets.

The nominal value of the financial economy (even now after substantial de-leveraging has taken place) is staggeringly out of sync with the size of the real economy (think national income without factoring in all of the phony money in the financial services sector) and when confidence and liquidity disappear the vulnerability of the edifice upon which promissory notes and global IOU's is fully exposed.

There really has been no serious debate about whether the role of the state should absolutely be one of protecting the interests of those deemed by financial technocrats as "Too Big to Fail" - i.e.major Wall Street firms, PIMCO, insurance companies, and pension funds and maybe even key municipalties - it has just been taken as a given. Until and unless there is such a debate we should continue to assume that systemic accidents, which are an inevitable consequence of the boom/bust tendency at the core of the human psyche, will be colossally expensive. Financing the cleanups from such accidents will prove ever harder to accomplish in the future.

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