Rogers gets it right, as usual. From the Wall Street Pit:
“Commodities legend Jim Rogers talks in this Bloomberg interview about Greece’s fiscal problems which needless to say are hardly a new development. According to Rogers, a bankruptcy for Greece would benefit the euro.
“They should let Greece go bankrupt,” said Rogers. “It would be good for the euro. It would be good for Greece. It would be good for everybody. If Greece went bankrupt then everybody would say, boy, the euro is serious, is going to be a sound currency and the euro would go straight up. Is not gonna happen that way, but that’s what should happen.”
Exactly right. Currencies go under because the governments behind them behave imprudently, as Cato’s Dan Mitchell points out.
Robert Wenzel, who has been right on top of the Greek story, writes:
“In fact, a Greek bankruptcy would be the best thing for the euro. It would show that the European monetary union is less subject to political pressures than individual sovereign states, for most assuredly the PIIGS, if they still managed their own moneys right now, would certainly be printing away right now.”
Had the US let the financial industry go under and refused to bail them out, the dollar would immediately have shot up. The decline of the dollar reflects the market’s loss of faith in the US and its reserve currency.
When governments act like genuine market participants – i.e. take their medicine – their currencies strengthen. Greece, acting on its own, showing independence of European bureaucratic constraints or bail-outs, would have to be a positive for the euro, because it indicates an end to the bottomless pit of financial irresponsibility..
Rogers is also right that speculation isn’t the prime mover of these events.
In the Greek case, I understand the notional value of the CDS’s (credit default swaps) involved are not big enough to impact the debt. However, for whatever reason, Rogers avoids talking about the larger issue of fraud in the use of currency swaps, fraud in the original contracts, and fraud in short-attacks, which are quite a different matter from market participants voicing their “opinion.” (the notional value of CDS in relation to debt is apparently not large in this case, though it’s important in other cases, like AIG)
Rogers, like the rest of the financial industry, is thus talking the professional ideology of the financial industry, and you can see all the others – from Mish Shedlock to Zerohedge to Chanos – lining up to defend that ideology.
It’s unfortunate, but it’s also something I feared…that some of the “citizen journalist” sites would corral popular outrage over Goldman Sachs and its allied hedge funds….and then steer that outrage in ways that protect the industry. And that they would finally end in support of the big players, while defusing the original anger into essentially useless diatribes. Meanwhile, those engaged in any action that might actually weaken the powers-that-be would be demonized and marginalized.
That’s seems to be what’s happened. Which is why the call for a ban of CDS contracts strikes me as not (necessarily) terribly useful.
My point is that that while it’s true that CDS’s have been gamed, a ban on them distracts from all the other issues of fraud. CDS’s are sold as if they’re insurance….and they’re used to gamble on price-movements. A player intent on fraud doesn’t need to rely on CDS contracts alone to commit a fraud. Ban CDS contracts, and he will just use another technique. Again, the problem is not the CDS contracts themselves, but the fraud involving them.
To recognize this, you just need to go back a bit. If you rewind twenty-five years, to Milken’s junk-bond innovations, there too what ought to have been an instrument of financing became an instrument of gambling.
Read Michael Lewis’ Liar’s Poker for a brilliant account from a former insider. Yet, today, it is Lewis, with Einhorn, who’s arguing to ban CDS’s. You’d think Lewis of all people would know it isn’t the gun that’s the problem, it’s the people who use guns to commit crimes. (Felix Salmon has a good criticism of Lewis on CDS’s at Portfolio.com).
Indeed, Lewis himself makes that point in his book:
Quote:
“Junk bonds behave much more like equity, in shares, than old-fashioned corporate bonds…… Therein lies one of the surprisingly well-kept secrets of Milken’s market. Drexel’s research department , because of its close relationships with companies, was privy to raw inside corporate data that somehow never found its way to Salomon Brothers. **When Milken trades junk bonds, he has inside information. Now it is quite illegal to trade in stocks on inside information, as former Drexel client Ivan Boesky has ably demonstrated. But there is no such law regarding bonds*** (My emphasis)
……Not surprisingly, the line between debt and equity, so sharply drawn in the mind of a Salomon bond trader (Equities in Dallas!) becomes blurred in the mind of a Drexel bond trader…” (p. 217)
Lila: Eventually, the flood of money attracted to junk bonds had to find new places to go. From that, sprang the leveraged buy-outs (LBO’s), the corporate raids of the 1980s.
Quote:
“The new and exciting job of invading corporate boardrooms appealed mainly to men of modest experience in business and a great deal of interest in becoming rich. Milken funded the dreams of every corporate raider of note: Ronald Perelman, Boone Pickens, Carl Icahn, Irwin Jacobs, Sir James Goldsmith, Nelson Peltz, Samuel Heyman, Saul Steinberg, and Asher Edelman….” (P. 220)
Lila: Transpose an octave….fast forward twenty-five years…and you could be describing CDS’s…. And just as the problem then was not the junk bonds themselves, but the use made of them (to gamble and raid companies), so too with CDSs.
Of course, the raiders saw themselves as performing a valuable service in cutting out fat from management…and in many cases, that was so. But, killing someone to cure him isn’t usually regarded as the most brilliant of remedies. Why should it be different in the financial industry?
Again, the problem is the actors and the activity, not the instrument. We need to differentiate between them. We also need to differentiate clearly between short-selling (legitimate) and naked short-selling (fraudulent); between speculation (helpful to the markets proportionate to economic activity), versus casino capitalism (extremely game-changing and dangerous where it is now); between investment (socially productive) and gambling (socially destructive); between legal and fraudulent activity.
Now they’re all mashed up and argued fungibly.
People blame either the government..or the speculators, black and white, forgetting that in many cases the speculators ARE the governments…in the sense that they’re in collusion with some of the banks that have their functionaries creating government policies, and have their advocates in the media, influencing public opinion as they wish.
Meanwhile, sift through the opinion-making carefully…looking for a confusion of all the terms I’ve listed. Wherever you find that confusion, be wary. Sometimes the confusion is just honest error. The rest of the time it seems to show an intent to mislead.