Sorry for the delay in getting back on this, but I've been setting up the magnificent http://d-squareddigest.blogspot.com , in order to get in on the trailing edge of a dying trend.
I have to say, Michael's interpretation seems a lot more convincing to me than Stiglitz's, on consideration. Any chance of getting JS to clarify his meaning, Doug?
>I think I understand everything you're saying, but the >last sentence
still
>doesn't seem to me to follow. What's going on now in >Brazil, where credit
>is being almost entirely cut off, and sending the country >into crisis, is
>not happening because of events of default -- is it?
True. What's happening there is that the debt itself is very short term in nature, so the question of "calling in" the loans doesn't arise; the banks can just wait three months until they "mature" and then not roll them over. Though in actual fact, everything I've been seeing over the last week or so has been banks saying that they will roll over Brazilian corporate lines.
> It seems rather that
>it's happening before them, and that the looming threat >is precisely that
>if this goes on it will set off such a mass wave of >default. This seems
>also to be what happened during the Asia crisis. So in >this first stage,
>credit must be being tightened in ways other than using >the events of
>default clause, e.g., through new loans not being made, >through loans not
>being rolled over, through credit facilities not being >renewed.
yeh.
>But all of that combined is not the same as saying "the >bank can ask for
>those $100 million dollars at any time." Because, if I >understand
>correctly, it can't. And therefore it would seem that >prudence wouldn't
>demand a dollar for dollar set-aside by the country for >reserves any more
>than a bank itself would put all its deposits in >reserves. Rather it
>would demand a similarly small percentage set-aside. In >which case
>Stiglitz's larger analysis (appended below to jog >everyone's memory)
would
>not hold: countries could conceivably grow through loans >the same way
>banks could grow through deposits -- because only a small >part is held in
>reserve and the rest is let out to more productive uses.
I have to say that this seems pretty watertight to me. Richard Portes has a good line in pointing out that the optimal frequency of crises is not zero; in fact, if we were never to have a crisis, it would be evidence that not enough risk was being taken (that countries were following the overcautious approach you identify)
>(The common
>occurrence of balloon-style loans would increase the size >of the
>percentage set aside but I don't see why it wouldn't >still be a small
>percentage relative to the total loans outstanding.)
>Now I would certainly give my assent to an alternative >argument, which is
>that to the extent that countries operate like banks, and >only put aside
a
>percentage of capital to cover their loans, they are then >liable to runs
>on the bank just like banks. And that if there is no >lender of last
>resort in this "banking" system -- and there isn't -- >then this is a
>disaster that is almost certain to happen to every >country that
>participates.
I think even this is too strong. Even granted the "disaster", I don't think anyone could seriously argue that the Southeast Asian economies are not, on the whole, better off rather than worse for their involvement with the banking industry.
> And that therefore the risk of loss outweighs the
>probability of gain and countries should be advised not >to do things this
>way for the same reason that a poor person should be >advised not to put
>her money in a shaky banking system that was w/o >depositor insurance and
>prone to runs. But that's a very different argument, it >seems to me, than
>the one Stiglitz himself is making.
Yes it is, and a much better one unless I'm missing something. I personally would square the circle by suggesting the reason that we don't need an international lender of last resort is that it doesn't matter as much if countries default as if banks do, but I admit that my views on sovereign default are heterodox (though becoming less so; a mate reports that Martin Wolf of the FT is coming round to the idea that if a country's bonds trade at a 10% premium to Treasuries, it ought to default once every ten years).
>One could also make a simpler argument: that a bank that >paid 18% to 20%
>on deposits wouldn't have a chance in hell of making it >either, and the
>idea that countries can get ahead by acting like banks on >these terms is
>madness.
ach, you are a pessimist .... there are a fair old few hedge funds which have the economic structure of "banks which pay 18% on deposits", and if they're structured right, they can do very well. JS's "standard of prudence" is too darn prudent.
cheers
dd
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