New Delhi-based economist Ajay Shah has a fascinating column in India’s Business Standard (via Bayesian Heresy) in which he makes the case that the current financial troubles in the U.S. may bring a recession, but can’t really be called a crisis. I recommend reading the whole thing, but here are a couple of key passages:
In such difficult times, why is the US economy still rolling with the punches? Why has the US economy not collapsed in a mire of failed firms, finger-pointing by government agencies, morchas in the streets, and JPC inquiries? Understanding how this shock is being absorbed, and the equilibriating forces in play, is important in making a call on whether this is a crisis or a mere recession.
In the idealised world of securitisation, a parcel of home loans is converted into securities, which are then sold into the broad market. The ownership of these securities is dispersed amidst international hedge funds, pension funds, etc. The originator of the home loan is largely immune to the outcome : if a default takes place, the losses are borne by the owners of the securities.
Many critics of securitisation have pointed out that this theory has not quite panned out as expected. However, at the same time, there is no doubting the fact that securitisation has given a substantial dispersion of the $400 billion loss. For this reason, the impact of the massive loss on the US financial system is not as large as it might otherwise have been.
A JPC appears to be a Joint Parliamentary Committee, a morcha is a “public demonstration for conveying a protest or making a demand.” I’d say we’ve already had the equivalent of a few JPC inquiries in the U.S., with many more yet to come. As for morchas, those are probably coming, too–although they’ll remain pretty calm affairs unless the economy gets really bad.
The point about securitization is really interesting. As lots of smart folks have been saying lately, we’ve got an insolvency problem. But it may be dispersed so widely that relatively few financial institutions are in fact insolvent.
Then there’s this gem from Shah:
Unlike many countries which have experienced crises, monetary policy in the US is manned by brilliant intellectuals like Ben Bernanke and Fred Mishkin. Few people in the world understand the interplay between monetary policy and financial sector difficulties as well as them.
Fed governor Mishkin goes by Rick, not Fred (his full name is Frederic). But whatever–he is really smart, and Bernanke (whom I don’t know nearly as well) seems to be too. I’m generally hesitant to place all too much trust in smarts. But I guess it’s better than putting trust in dumbs.