Postponement and Inevitability

The bondholders of Dexia have been saved (Dexia has failed). Greece has defaulted without triggering a credit event (Greece has failed). The European banks will be recapitalized with the assistance of more borrowed money from the same States that find themselves in financial difficulty (the european banking system is failing).

We're approaching grave problems with frivolity of a child's game, making up rules, imagining or creating a new reality when the scenario doesn't please us, threatening to take our marbles home if the others won't play by our rules. WTF.  

The financial environment is a part of the economic ecosystem.  We know that pollution and toxins in one corner of the environment can have an impact on an entire ecosystem. Once the dioxins are in the ground water or the oil spills out of a ruptured tanker we can no longer prevent or contain the problem, we must clean it up. 

The economic ecosystem and all its micro environments; labor markets, capital investments, innovation, social programs etc. have been compromised by ignoring reality and by attempting to prevent a catastrophe that has already occurred. Like a war that has already been waged, it's time for the reconstruction to begin, which means bulldozing the irreparably damaged structures (inefficient financial infrastructure) and starting over, building on the foundations and the pillars of what has remained, what has always remained (values and culture).

The difficulty in all of this lies in the ability to recognize or admit that we don't know and we can't know everything. Intellectual humility over ideological hubris, reconciling reality to truth.

Occupy 99% of What? Mediocris

Where is Man in all of this?  I see myself in this, I'm part of that.  Averages are insidious and do not define the individual. As soon as I become an aggregate, I surrender mySelf and kill my Identity. Aspiring to affirm mySelf, only then am I honest and coherent.  Our strength and courage is undermined by a need to belong, to become part of 99% of some group or some ideology. Abandoning the search for Self in a population allows us to discover and embrace all that we are, the totality of OUR own attributes. This is the difficult, frightening and painful  journey on which we must embark, the covenant we are obliged to make with ourselves....to be rather than to seem.

Heroin and Meth.

Planning to plan, preparing to announce, close to an agreement, a susbstantial (levered) arsenal (of more debt). My friends, Europe is on the road to recovery!  Like the heroin addict who can "kick his habit" by getting some publicly provided meth, the underlying illness goes on but we can temporarily all feel a little better. 

Anything that can't continue indefinitely must end and debt that cannot be repaid must be defaulted on or restructured, with the irresponsible parties bearing the consequences for their mismanagement and malinvestment (indebtedness). Until now, "we the public" have born the burden of malfeasance,  fiscal mismanagement, mischief and moral hazard in the form of economic stagnation from the misallocation of capital.  

We don't know if a sovereign (or bank) default will bring Mr. Geithner's “cascading default, bank runs and catastrophic risks”, certainly those are possible outcomes but almost as certainly they are not the only outcomes, and possibly they are not even the most probable outcomes, we just don't know.  Myopia has petrified us and has caused the authorities to not consider alternative solutions in which the risk takers bear their losses but depositors and taxpayers interests are rightfully safeguarded.

The choice is clear: continue to lever up, incessantly accumulating more debt, substituting / alternating meth for heroin,  or treat and conquer the illness inflicting the inevitable pain and discomfort on the addict (debtor) and his pusher (creditor).  In the first case the addict continues to live (until he doesn't) imprisoned and immobile in his addiction and in the second he recovers, probably damaged and scared, but he moves forward responsibly, unchained and knowledgeable of his errors and his opportunities.  

Dexia is to Greece as Bear Stearns is to Lehman?

Can anyone really know? It all depends on what mistakes the Policy Makers (Masters of the Universe) will make in saving institutions (the bondholders) or countries that are not solvent. By the way, if a bank is insolvent its shareholders and bondholders should not be rescued with Public money. Liquidating the assets and liabilities should provide the funds necessary to save the depositors and customers, and in some cases some bondholders (with a haircut). That's the nature of risk taking, whoever takes the risk gets the rewards and the eventual losses, but making bondholders whole through a Pubilc subsidy is a terrible allocation of capital and further distorts future allocations of capital.

Supporting virtuous, adequately capitalized institutions that have temporary liquidity problems (not a solvency crisis) via collateralized loans at appropriately high interest rates is necessary and serves the public good. Bail outs based on fear and moral hazard resolve nothing and postpone the inevitable. Many thought that the programs created after the default of Lehman would have solved our malinvestment problem, yet here we are again, failing to address the underlying cause of the illness: too much debt, private and public, and the impossibility respecting all our obligations.

Dexia, Greece, etc.are nothing new. In economic and financial market history there have always been "failures" caused by mis-management and mistakes in risk taking. The policy response (or better yet the lack of a repsonse) during the "failure phase" can provide space for an appropriate and effective policy response during the restructuring or reconstruction phase.

Unknown unknowns

Non si può preparare (hedge) per le incognite incognite ma per le incognite conosciute si'.
Nella kurtosi delle code e nella kurtosi della distribuzione delle code e' nascosta la verità e la casualità degli eventi,  le conseguenze della nostra inevitabile ignoranza.

The Future is Written or The Writing is on the Wall

From John P. Hussman PhD (www.hussmandfunds.com):

"Despite a Greek 1-year yield that is already over 100%, it is still possible to kick the can down the road for another few months with another bailout, but the costs of that would now be extraordinarily high because of the low expected recovery rate. Much better to provide the funds to a post-default Greece, or to use them to recapitalize the banking system after losses that now appear inevitable."

Financial Wisdom in Pictures

http://www.behaviorgap.com/sketches/   Presented without comment...enjoy!!
                                                            
                                                        

Thinking and Acting

Today I'm posting a quote that surely is useful in investing and probably useful in any desicion making under conditions of uncertatiny...life for example. From Benjamin Graham, a great thinker and financial analyst:
"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if your judgement is sound, act on it--even though others may hestitate or differ."