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Generational Dynamics Web Log for 29-Jan-2010
29-Jan-10 News - Greece financial crisis spreading

Web Log - January, 2010

29-Jan-10 News - Greece financial crisis spreading

Ben Bernanke is confirmed

Greece's financial crisis pushes down stocks on Wall Street

It's an interesting chain reaction.

Yesterday we mentioned the rumor that Goldman Sacks was putting together a deal where China would buy Greece's bonds, after Greece's public sale had been at very high interest rates. (The Greek newspaper Kathimerini (translation) contemptuously calls them "usurious.")

The rumor has been firmly denied by Goldman, by Greece, and by China.

That caused investors to become anxious over Greece's and Portugal's worsening budget deficit crises, with the prices of credit default swaps reaching fresh record highs on Thursday. The euro fell sharply against the dollar, reaching its lowest level since July 14, according to Bloomberg.

Now, let's recall how many pundits explained the unexpected stock market rally last year. (See, for example, "Nouriel Roubini apparently is predicting a global market crash.")

Last year's new stock market bubble was driven by massive stimulus spending by the government. With Treasury interest rates effectively zero, investors borrow money at zero percent interest rates and invest the money in commodities and stocks, or in foreign currencies paying higher interest rates. This is a typical "carry trade" scenario, especially since the stimulus spending caused the dollar to weaken against other currencies.

Once the dollar begins to strengthen again, the above reasoning reverses. Investors who borrowed cheap dollars rush to pay back the loans before the dollars become even more expensive. In order to pay back the dollars, they have to sell the assets they purchased with the cheap dollars, including stocks.

So that's the chain reaction:

The Greek (and Portuguese) budget deficit crisis worsens.
This causes the euro to weaken against the dollar.
This causes the dollar to strengthen against the euro.
Investors who borrowed cheap dollars to invest now have to sell their investments, pushing prices down.
Insofar as those investments are stocks, stock prices go down.

The Greek deficit crisis is increasingly turning into a euro currency crisis. Whether it fizzles or gathers steam will affect a lot more people than the Greeks.

Ben Bernanke is confirmed as Fed Chairman for a second term

The opponents of Ben Bernanke's nomination claimed that he caused the real estate bubble that caused the financial crisis, or at least that he was oblivious to the danger.

These are idiotic reasons. He couldn't have caused the real estate bubble, because the world wide real estate bubble began in the mid-1990s. (See "The global housing bubble began in the mid-1990s." and "The housing bubble began in 1995.")

It's true that Bernanke was oblivious to the bubble, and I've been bitterly critical of him for that, but all the people criticizing were even more oblivious than he was.

One thing that's absolutely hilarious about this situation is that the analysts, journalists, politicians and economists who are now criticizing Bernanke were saying really stupid things at the time, like "There can't be a housing bubble, since everyone has to live somewhere." You didn't have to a rocket scientist to know that there was a real estate bubble, since I was writing about it on this web site in 2004. (See "Real estate is in an overpriced bubble all over the world.")

These people, who are now criticizing Bernanke, are simply hiding their own complicity in the bubble. Those who were able to got as much as they could out of the bubble -- money or political power. Having acted without a shred of ethics, they're now blaming Bernanke.

What's past is past, and now we're approaching a major new financial crisis. If Bernanke hadn't been confirmed, then the choice might have gone to some political hack, like Larry Summers or Paul Krugman. Ben Bernanke is the best person I can see on the horizon to help us get through the coming catastrophe.

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The Financial Times says that "An explosion in trading propelled by computers is raising fears that trading platforms could be knocked out by rogue trades triggered by systems running out of control." I wrote about this last year. (See "The Bubble Algorithm - How computers and herd behavior are inflating the stock market bubble.")

The climate scientists who were exposed by the hacked "climategate" e-mail messages last year were apparently breaking the law, according to The Telegraph. They were illegally hiding or destroying data that they were required to reveal under Freedom of Information laws.

When there's nothing else to blame, then blame video games. Well, Dungeons and Dragons isn't a video game, but prisoners in Wisconsin prison are being forbidden from playing it because it "could lead to gang behavior and fantasies about escape," according to the NY Times. Hmmmm. I wonder if when bankers are in jail they're forbidden from playing "Monopoly"?

(Comments: For reader comments, questions and discussion, see the 29-Jan-10 News - Greece financial crisis spreading thread of the Generational Dynamics forum. Comments may be posted anonymously.) (29-Jan-2010) Permanent Link
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Generational Dynamics Web Log for 29-Jan-2010 29-Jan-10 News - Greece financial crisis spreading

Greece's financial crisis pushes down stocks on Wall Street

Ben Bernanke is confirmed as Fed Chairman for a second term

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Generational Dynamics Web Log for 29-Jan-2010
29-Jan-10 News - Greece financial crisis spreading