05.06.10
The Greek debt crisis finally spilled over in full force to U.S. markets, aided and abetted by extreme statements emanating from such esteemed and prominent voices as Muhammed El-Erian of the large bond investor Pimco, who warned that Greece could be just the beginning of sovereign debt catastrophes. In the space of minutes, the major U.S. indices plunged more than 10%, fueled by the same programmatic electronic trades that were part of the battering in late 2008 into 2009. And then in the space of 15 minutes, they recovered, without – it’s fair to say – much human decision-making during that interval (and if an individual even tried trading during those 30 minutes, they would have found it difficult or impossible, as web sites such as schwab.com were completely overwhelmed with traffic).
The fact that the Greek restructuring of about $140 billion was less than the single bail-out of financial firm AIG in the fall of 2008 seems not to matter; nor does the fact that while AIG and a half dozen other “too big to fail” financial institutions had trillions in derivatives outstanding, the country of Greece does not. Its history is rich, but its economy is not. Yet that isn’t deterring people from panicking, nor preventing the hobgoblins from feasting on collective fears.
Markets have to be respected – it doesn’t matter much if you’re “right” when the streets are filled with panic and volatility. But that doesn’t mean we have to join the party and play in the wagon’s band. The problems of Europe are real, and political. Relatively cash-rich Germans resent helping Greece, and Greece resents being in the position of requiring help. The entire European Union, meanwhile, continues to confront the challenges of its unwieldy currency and strong social safety nets, but I doubt the current crisis will lead to much less partying on Mykonos this summer. And in northern and Eastern Europe, newer members like Latvia are embracing levels of austerity that the Greeks aren’t even contemplating – without riots, because the fear of Russia is greater than the perils of restructuring their economy. And while debt levels in Spain and Portugal alarm, their issue for now remains the myopic and knee-jerk reflexes of ratings agencies such as Moody’s and S&P that everyone knows are broken but no one really wants to fix. Without them to blame, people would have to start taking responsibility for their own risks and do their own due diligence.
So let’s respect the panic for the harm it can do, but not grace it with a substance that it lacks. We’ve been down that path recently, and it’s not one we’d want to walk down again soon. The world is full of problems, always has been, likely always will be. Greece is currently one of them, but there will still be lots of people basking in the Mediterranean sun reading about it on their $1000 iPads in a few weeks time. That is no less a reality, and it says something quite different about the world we’re in