Saturday, December 06, 2008


Doing the same thing over and over again and expecting different results.
-Albert Einstein

I can't think of a better quote to describe today's world. While the specifics of our economic crisis are complex, the fundamental reason behind it is fairly basic: too much debt. Individuals can't pay back their mortgages, so banks (who lent money to these individuals) can't pay back their loans.

The lesson? Don't lend money to people who aren't likely to pay it back. And don't take on too much debt.

So what does our government do? Take on unprecedented levels of sovereign debt to lend money to financially unstable companies. Insanity.

With an auto industry bailout more than likely, the flood gates are poised to be thrown open, with every industry asking for their share of government aid. And the fact is that many of these companies will go under even with government aid - we're not going to get some of the money back.

My problem here isn't government involvement in private industry, and I'm not railing against these moves on the grounds of destruction of moral hazard (though both are substantial points, especially the latter - we really are setting an awful precedent of privatization of gains and socialization of losses).

But, very simply, in light of recent and potential future government action, I fear for the solvency of our nation. During this crisis, banks and businesses have gone (and will continue to go) bankrupt doing the same thing that our government is now doing, and that's scary. What's that? Youu say America going under sound can't happen? Tell that to Iceland.

One of the philosophical miscalculations behind this economic crisis was the systematic underpricing of risk, and I worry we're making the same mistake now. It's very similar Nassim Nicholas Taleb's thesis in Black Swan and Fooled by Randomness - that we underestimate the likelihood of highly improbably but potentially devastating events.

In the financial world, these events are, for example, currency movements or interest rate changes - the types of things that can (and have) blown up hedge funds and banks.

My argument, then, is that we are similarly underpricing the risk of negatively game-changing geopolitical events, leaving us more susceptible to sovereign insolvency than we've ever been. Figuratively speaking, we're walking the tight rope without a net. As we increase leverage, we owe other nations more and more money, subsequently increasing the likelihood of a circumstance where we don't have enough money to pay those countries back.

Or, more simply, if something else goes wrong - an Israel/Iran or India/Pakistan war, a mega natural disaster, a Chinese currency devaluation, a major terrorist attack, more bank/company failures, etc. - we're very possibly screwed.

And in today's world, something else probably will go wrong...


  1. While I completely agree with you, you overlook some points that a product of Wharton should be among the first to note:

    You can't compare Iceland to America because a) they were even more staggeringly over-leveraged than American banks were, b) EABFO and c) Iceland's debt was denominated in USD. Iceland's banks eventually ran into a liquidity crisis as they didn't have enough USD to hand out. When Iceland needs USD, Iceland has to buy USD. When America needs USD, America...simply prints more USD (in what is good for our immediate needs but terrible for our long-term fiscal discipline).

    One nice thing is that the government is getting a great deal on the debt it issuing, as interest rates for US bonds are not at or even below zero. In this shitty world we live in (with a fissiparous Euro, collapsing potemkin ruble (with the Chinese RMB not far behind), an eternally stagnant JPY, global capital still views the USD as the best--or perhaps more accurately, the least worst we have.

    I can't believe i wasted 10 minutes of my life typing this. I h(8) you.

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