The perspective of the statesman and the perspective of the blogger (or scholar)

Some of you have asked me what I think of the concerted central bank effort to flood European banks with dollars.  Ed Harrison noted the Fed is playing it down (no press release, perhaps a fear of treason charges), I believe Roubini viewed it as a hidden forex move.

I find it a striking dilemma and here is why.  The blogger in me thinks: “This just postpones all the major decisions.  Once the loans are up the banks still will be strapped, and the longer you wait to resolve financial crises, the more they will cost.  There is no eurobond and no rapid economic growth at the end of that tunnel.”

If I were Trichet, or some other involved statesman, I would have done what was done, albeit sooner.  The statesman in me would think: “This just postpones all the major decisions.  But I can’t send everyone to their doom just yet.  Maybe there is some way I am wrong and a month or two from now things will look different and we can make another decision then.”

I am never sure how to reconcile these two perspectives.  Of course, in real life I am a blogger and not a statesman, for good reasons I might add.

In the meantime, the banks are lobbying the BRICS.

Comments

In the long run, we are all dead.

I don't think it matters whether you are a blogger or a statesman.

I don't think it matters whether Trichet is a blogger or a statesman.

Panic is a perfectly acceptable response right now. Either that or hitch a ride on the nearest Vogon Constructor ship.

If you were a statesman you *might* convince me that you need time to prepare the plans and the public for the inevitable end game. But I don't see any statesman, just politicians who are making decisions similar to a "rogue trader" playing with billions in borrowed capital. You have a big payoff if you survive the game; at worst you get fired, write memoirs and spend the rest of your days in the lecture circuit.

Listen to the silence as the pin drops.

Dear Mr. Cowen

1) Perhaps you need to reflect on what happened to Long Term Capital. Being smart and having "models" tells one little about the real world.

2) Patterns of history do tend to repeat themselves. 230 years ago, under the Articles of Confederation, our Founding Fathers realized that we needed to put aside all regional differences and develop a strong national government, which the reactionary right (now Tea Party) could not stand.

3) Europe is now at that cross roads. What the people you describe are buying is time for Europe, against all odds, to form itself into a Nation. Italy has already said they will join.You badly have "Man with a hammer syndrome," worse than anyone I read. Distribution of income is a political question, so all the future answers will be political. Capitalism, especially under the twin pressures of globalization and the Internet, can never be stable. That was the lesson of deposit insurance, which you have never understood.

Dugger says buy guns and ammo:

August’s selloff was the first tremor of the coming fiscal earthquake
 Slowdown risk was partly responsible for August’s market downturn but fiscal adjustment cost
discounting is the reason for the outsized selloff. Shocked into deeper awareness, asset managers
started asking how companies might be hurt by spending cuts and tax increases needed to achieve
fiscal sustainability. They realized three things and started selling --
1. Big-time fiscal stimulus is a thing of the past. Loss of fiscal stimulus is one of the costs smart
investors began to factor into their valuations of company debt and equity.
2. Companies will be hit directly by austerity driven spending cuts and tax increases and so will
their customers. These fiscal adjustment costs need to be included in company valuations.
3. Most investors haven’t caught on yet. If large positions need to be scaled back or protected
by derivative hedges, this needs to be done now before fiscal adjustment cost discounting
becomes widespread.
 The Budget Control Act (BCA) did not represent any real progress in solving the underlying drivers of
public debt, and it allows Congress to kick the tough decisions even further down the road, increasing
crisis risk and the ultimate amount of fiscal austerity. Furthermore, the fall calendar is too packed
with deadlines and the partisan environment too polarized for any meaningful progress on a job
creation agenda.
 Growth assumptions in budget projections are too optimistic. Below forecast growth means the deficit
will grow faster than forecast, and the U.S. government may hit the debt ceiling again before the
November 6, 2012 election

http://www.hanoverinvest.com/pdf/HIGComment110912Earthquake.pdf

Tyler, you're a child --you shout STOP IT! Someone is bothering you, and you react as a child.

When someone is "almost" certain that he/she will have to take a loss, indeed it's much better to do it at once. When you are not so sure, then you take your time. I assume that D. Kahneman's new book will be a good reading for children and scholars that don't want to be bothered by others.

When "you" means several people as in a collective, then "you" must be sure that there is some agreement on taking the loss. When the parties involved are collectives, then you play all sorts of games about how the losses are going to be distributed among the parties and within each party. And when the parties are political collectives (governments), you apply public choice to figure out how the parties are going to loot different groups of present and future taxpayers.

And this is for people anxious to shout STOP IT!

http://gregmankiw.blogspot.com/2011/09/problem-with-industrial-policy.html

And talking about anxiety, eat yogurt! Read

http://online.wsj.com/article/SB10001424053111904265504576566820066488938.html

From Merkel & Co.

To U.S. Taxpayers,

We need more compassionate taxpayers to take part of the losses.

Look forward to your contribution.

http://bottomline.msnbc.msn.com/_news/2011/09/16/7795342-us-taxpayers-could-be-on-hook-for-europe-bailout

My reaction to the news was "Ok, we're going to flood the system with cash and let Greece default." The extra cash will cushion the shock and avoid bank collapses, perhaps. What other point does it have?

Germany and France weree keen to bail out Greece to avoid German and French banks being hit by losses. Why, I ask myself, would the US be keen to bail out European banks?

dearieme,

If (when) Greece fails, Europe takes a huge hit and the U.S. suffers as a consequence. Obama's reelection prospects worsen materially. Worse,Greece was/is a debt financed welfare state. The credibility of of the Obama model takes a beating, post-default.

Muddling works because things will eventually become a complete crisis, or completely i irrelevant. When it's a complete crisis, there won't be much problem getting a bunch of disagreeable people to agree, and when it's irrelevant, then nothing needs to be done anyway.

I think the staemen view isn;t to bad since they're taking into account that people will game whatever fix you put out anyway.

To paraphrase, you stated as a blogger it is best to take the loses now as delay only makes the eventual losses worse. As a statesman you say, “This just postpones all the major decisions. But I can’t send everyone to their doom just yet. Maybe there is some way I am wrong and a month or two from now things will look different and we can make another decision then.”

I am not saying this is necessarily the case here but you left out an obvious possibility. As a statesman, I know delay just makes things worse but that's a good thing. Because, the greater the crisis the easier it will be to make the radical changes in government structures I desire.

Their are plenty of historical cases of statesmen utilizing the "big lie" to politically maneuver the public into their desired ends. It shouldn't be ruled out here.

Once upon a time in China, there lived an Emperor who owned a majestic white stallion, the finest beast in all his Kingdom. One night, a thief tried to slip in and steal the horse, but was captured by the palace guards and thrown into the dungeon.

The next morning, he was dragged before the Emperor's court. "How dare you," bellowed the Emperor, "lay hand on my royal steed! Jailor, put this thief to death!"

Immediately, the thief bowed deeply. "Your judgement is peerless and wise, O Emperor," he calmly replied, "but my life is of little value. I should offer you a gift before I depart. Your mount is quite a fine one, but if your eminence would spare my life for just a year and a day, I swear to you I can teach that horse to sing hymns!"

The court burst in to laughter at that, but the Emperor was intrigued. After all, you didn't get to his high position by turning down freely offered gifts, no matter how far-fetched they seem. To the surprise of all, the Emperor quickly accepted the offer.

As they were leaving the chambers, the jailor whispered to the thief, "You are a fool!"

"I am a fool?" replied the thief, smiling broadly. "Much can happen in a year and a day. The King may die. The horse may die. I may die... and maybe the horse will learn how to sing."

Doesn't just postpone it... it makes the problem bigger. When the crash happens it will be even bigger.

The blogger/statesman dilemma is not a profound one. Obviously self-interested people have different analyses and are overly optimistic relative to objective, uninvolved people. But that does not give self-interested people any special claim on having solutions that are sensible or worth listening to.

OTOH, Matt, the statesman involved in the issue may have more detailed knowledge of it than the blogger/scholar. And labeling all "statesmen" as being "self-interested" does not help. Are not blogger/scholars "self-interested"? Your remark suggests that the statesmen are "in it for the money" or maybe the glory, although presumably the latter is tied to what they do being perceived as working out successfully, in which case presumably the dichotomy Tyler presents would not exist at all.

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