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Too much tail risk

greekriots.JPG

The consensus, as I understand it, is that the Greece bailout might work -- but probably won't. That shouldn't matter that much, as Greece isn't that big: 3 percent of the Eurozone's GDP, and a much smaller percentage of global GDP. But look at the consequences of the instability: The euro might collapse. The American stock market just tanked. Spain and Portugal are teetering.

The global financial system is really vulnerable to shocks right now, and the various governments that could respond are pretty deep in debt. The IMF and the eurozone just committed $147 billion to Greece. The oil spill in the Gulf of Mexico is going to add tens of billions, and maybe even more, onto the U.S. government's tab. That doesn't sop up all the excess capacity the system has to mount rescues, but there is, somewhere, a limit, and we are closer than we were before.

And think what could go wrong. Spain and Portugal could follow Greece, which could destabilize the European Union (which would, in turn, have a devastating effect on American exports). Many people think China is in a housing bubble, and it could pop. Instability in the Middle East, or any of a number of other factors, could send the price of oil skyrocketing. A successful terrorist attack in America, or some sort of pandemic flu, or...

I'm not trying to harsh anyone's mellow. But the reality right now is that the system is weak, and some of its fundamental vulnerabilities -- particularly in the shadow-banking market, which remains vulnerable to runs -- haven't been corrected. It's a scary time, and the combination of Greece, the gulf oil spill, and the attempted car bombing are an unhappy reminder that the world is still chock-full of tail risk.

Photo credit: Uriel Sinai/Getty Images.

By Ezra Klein  |  May 5, 2010; 2:44 PM ET
Categories:  Financial Crisis  
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Comments

Well, aren't we just full of optimism today?

Honestly, Mr. K, is this news? We live in risky times. How knew?

You are gainfully employed. I'll go out on a limb and assume you have a home with walls and a roof. And that you have had at least one good meal so far today.

You write about the risk of loss. Go to Haiti. Most Haitians are still without jobs or basic services. There's little left for them to lose.

If you're going to write about shadow banking or Greece, at least add something to the discussion.

Posted by: MsJS | May 5, 2010 2:57 PM | Report abuse

Ezra:

Perhaps I missed it, but have you opined yet on the unsustainability of welfare states run amok? (See "Greece" as poster child).

As you note, debt is already high in many other places as well. Greece's present could be our future (and there won't be a Germany there to bail the rest of us out).

Posted by: WEW72 | May 5, 2010 3:07 PM | Report abuse

You left out HCR.

Posted by: obrier2 | May 5, 2010 3:36 PM | Report abuse

Portugal isn't teetering -- it's wrecked. The difficulties in Portugal, Greece, and Spain are less troubling than the difficulties in China and (as noted above) the difficulties to come due to the US financial train wreck resulting from the PPACA.

The good news is that there are good old-fashioned paying jobs in agriculture and the manufacture of staple goods: as buyers reach the understanding that we must eat and we must have clothing, sellers are reaching similar conclusions. Further, those with good old-fashioned cash are also doing quite well -- unlike those who borrowed every cent to support an elite lifestyle and decided not to save for a rainy day.

If things are simply allowed to play out, the credit wizards of yesterday will fade as wiser cash-savvy souls assume leadership roles. I'm not certain that's a bad thing.

Posted by: rmgregory | May 5, 2010 4:10 PM | Report abuse

Aside from the photo, a bit too much focus on financial markets and too little on the streets. If problems erupt in Europe and elsewhere, it'll be in the latter.

Posted by: leoklein | May 5, 2010 4:13 PM | Report abuse

whoa whoa whoa I thought BP was on the hook for the Gulf???


but seriously we need to answer WEW72's very valid point. How much of this is due to welfare states gone awry and when you GIVE something its sadly next to impossible to take even some small portion of it back.


Posted by: visionbrkr | May 5, 2010 4:13 PM | Report abuse

Only in the U.S. could the mere threat of a terrorist act be seriously ranked alongside a very real environmental disaster and the economic collapse of another country as potential destabilizing factors...for the entire world. Truck bombs go off every day ( i.e., they actually blow, and they actually kill people) in plenty of places around the world. It would be nice to see the real victims of those attacks included alongside environmental disasters and economic collapses as reasons for concern.

Posted by: andrewbaron78 | May 5, 2010 4:19 PM | Report abuse

"You are gainfully employed. I'll go out on a limb and assume you have a home with walls and a roof. And that you have had at least one good meal so far today. Go to Haiti. Most Haitians are still without jobs or basic services."


is the only way one has the legitimate right to express grim concern over haiti, is to be there, without a roof over one's head?
what about the oil spill? do we have to live in louisiana?


is something wrong with candor and an honest appraisal of the vulnerabilities we are facing, especially this younger generation?
this is the world we are giving to our children.
it is very heartbreaking.

Posted by: jkaren | May 5, 2010 4:26 PM | Report abuse

No s*** Sherlock!

Many of us have been saying for months that the ability for the welfare state to provide generous social insurance to its population does not exist anymore. And then we went ahead with expanding the entitlement to health care anyway.

I will hope for the best to come of this situation, but if this world bubble crashes hard, I will be blaming those who naively thought we could provide goodies to those that do not add benefits to their society through their hard labor.

Posted by: lancediverson | May 5, 2010 4:43 PM | Report abuse

Things are in a bad way right now. I hope this makes you feel better, because it worked for me: http://www.freeimagehosting.net/image.php?b187a72038.jpg

Posted by: HerooftheBeach | May 5, 2010 4:50 PM | Report abuse

"I will hope for the best to come of this situation, but if this world bubble crashes hard, I will be blaming those who naively thought we could provide goodies to those that do not add benefits to their society through their hard labor."

out here in california, most of the hard labor is being done by mexican people....so we should be treating them very well.
who would be caring for children, for our agriculture...(.our two most vital assets) without them? is there any wealthy family in california that could dream of functioning anymore, without the hard labor of mexican people?
i think not.
.... for many of the things we rely on the most, if it werent for mexican people living in this state now.

Posted by: jkaren | May 5, 2010 4:54 PM | Report abuse

@ lancediverson : I will be blaming those who naively thought we could provide goodies to those that do not add benefits to their society through their hard labor.

I guess those working poor (janitors, hotel workers, home health care workers, food service workers, retail salespeople, you know, the jobs that don't offer affordable insurance) and middle class people (getting priced out of the insurance market) that might get a subsidy to purchase health insurance contribute nothing.

Synthetic derivatives traders, CDO and MBS creators, and computer arbitrage traders are "productive" members of society...right.

Your right wing elitism would be laughable if it weren't so pernicious.

Posted by: srw3 | May 5, 2010 4:57 PM | Report abuse

"I will hope for the best to come of this situation, but if this world bubble crashes hard, I will be blaming those who naively thought we could provide goodies to those that do not add benefits to their society through their hard labor."

And I'll be blaming people like you who were too busy clucking ancient Reaganite nostrums about how wicked we all and standing in the way of getting the actual business of government done so we can keep things running.

Posted by: adamiani | May 5, 2010 5:07 PM | Report abuse

At the moment, revenues are down because the economy sucks and the deficit peacocks are using that as an excuse to prove the world is falling apart.

They were wrong on deregulation; they're lousy at finance; and you know if they needed health care, the last thing they'd call it is a "goodie".

Posted by: leoklein | May 5, 2010 5:30 PM | Report abuse

i just read that engineers will begin controlled burns on the spillage tomorrow.

we have drilled and disturbed the ancient sea floor.
we have unleashed a sea-within-a-sea of oil.
we will now set fires on the ocean.
we are pumping chemical dispersant on the sea floor, without knowing the effects on the inhabitants who call the ocean their home.

in honor of the other life-forms on this planet, over which we hold stewardship, i am offering this picture of a leafy seadragon,one of the most fascinatingly beautiful and interesting creatures on the planet; to remind all of us, of the sanctity and responsibility we have to all of those creatures and living things with whom we share this beautiful planet.
http://www.google.com/imgres?imgurl=http://www.divegallery.com/Leafy_Sea_Dragon__1.jpg&imgrefurl=http://www.divegallery.com/Leafy_Sea_Dragon.htm&usg=__dYJs2rb97Pa9Lh_0ZOiWAT-3hbA=&h=680&w=632&sz=149&hl=en&start=1&sig2=sRCVt9yM-Mcj-mcjTG167w&itbs=1&tbnid=SDsdFJASCbrNhM:&tbnh=139&tbnw=129&prev=/images%3Fq%3Dleafy%2Bseahorse%26hl%3Den%26sa%3DG%26gbv%3D2%26tbs%3Disch:1&ei=h-PhS7L9L9D9_Aa3-5myAg

Posted by: jkaren | May 5, 2010 5:41 PM | Report abuse

you left out the icelandic volcano.

Posted by: ibsage | May 5, 2010 5:44 PM | Report abuse

you left out the icelandic volcano.

Posted by: ibsage | May 5, 2010 5:45 PM | Report abuse

"...harsh anyone's mellow."????

Far out, Ezra.

Posted by: emjayay | May 5, 2010 6:45 PM | Report abuse

Kudos to the commentators who properly pointed out that it was the laissez faire state run amok (not awry, you see it's what they do) that precipitated the bulk of the crisis, here and in good old Europa, including Greece.

Oh the good old Deutschers are bailing out Greece. Think again Einstein. It's the good old fumblerusski. You think they're helping out the Greeks. But when you look up it's the German (and other banksters) banks who are ending up with the geld. So the Greek people are getting screwed, the German (and other Euro) people are getting screwed. We here already got screwed to save our banksters. And what's the upshot?

Cut entitlements to save our(?) future and screw us some more. WTF?

You know why the rich are rich? Cause they be slicker than sheet! With grownups like that, we don't need enemies

Posted by: joemken | May 5, 2010 8:27 PM | Report abuse

joemken (and others),

the financial crisis certainly exacerbated the Greek situation. But Greece was on the road to ruin long before the crisis burst upon the scene. Take a real look at what Greece promised its people. Insanely generous pensions, bloated public service sector, early retirement ages, and broad welfare/entitlements. The bed they made wasn't sustainable "but for" the economic crisis. It was ONLY sustainable during huge boom periods (which are themselves not sustainable, and were actually caused, to a large extent, by the bubble associated with the current financial crisis).

Greece IS the poster child for European-style social democracy run amok. I do not contend that the US, or even most of Europe, is guilty of same mistakes (at least not to the same extent). They aren't. Much of the entitlement mess in Greece is the byproduct of true "socialist" governments, and not just the soft social democrat governments of northern and western europe. But this situation should highlight two realities: (1) governments can become so enraptured with handing out benefits that they dig their nations' own graves, all with best intentions; and (2) its all but (if not actually) impossible to roll back entitlements once granted (see e.g., riots in Greece).

There is no such thing as a free lunch. You seem to be upset that the Greek people are going to get the short end of the stick, and have to make sacrifices to save the banks holding Greek debt. Is it really a sacrifice when having the benefits in the first place was a pipe dream?

Posted by: WEW72 | May 5, 2010 11:56 PM | Report abuse

What is amok in Greece is not the welfare state, but the tax avoidance, especially on the part of the rich. They collect like only a third of what should be coming in.

Posted by: mminka | May 6, 2010 1:56 AM | Report abuse

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