Thursday, May 20, 2010

Cochrane on Greece, the Euro, and Systemic Risk (amv)

As you might know, I fall for Chicago's freshwater perspective.  Here is Cochrane's take in the WSJ. Teasers (especially for ls):
• Systemic risk. We're told that a Greek default will threaten the financial system. But how? Greece has no millions of complex swap contracts, no obscure derivatives, no intertwined counterparties. Greece is not a brokerage or a market-maker. There isn't even any collateral to dispute or assets to seize. This isn't new finance, it's plain-vanilla sovereign debt, a game that has been going on since the Medici started lending money to Popes in the 1400s. People who lent money will lose some of it. Period.

• Saving the banks. We're told that Greece must be bailed out, or large banks will fail. Savor the outrageous irony of this claim. Apparently, two years after the great mortgage meltdown, Europe's army of bank regulators missed the fact that large, "systemically important" banks had made firm-threatening bets on Greek debt. So much for the idea that more regulation will keep complex banks out of trouble.

If the claim is true (which I doubt), the right answer is to save the specific "systemically important" banks (or, better, their "systemically important" activities), not to bail out every Greek bondholder and the Greek government and to paper over the vast bank and regulatory failure that set up the problem.