Business, Economics and Jobs

The lexicon of financial disaster, part II


NEW YORK — Every era has its jargon, a kind of verbal currency that bestows “street cred” on the savvy practitioner and tells everyone within earshot that the speaker is, indeed, in tune with the zeitgeist.

Just over a year ago, we checked in on the avalanche of financial acronyms flooding the language thanks to the collapse of the supposedly all-knowing, all-seeing unregulated market capitalism. By now, “TARP” and “Too-Big-Too-Fail (TBTF) are on the tip of every school kids tongue. And we all seem to understand what Barack Obama and Viagra have in common: (stimulus).

Yet as the crisis has rolled on like a snowball down the poorly policed, garbage-strewn hill of global finance, it has absorbed a whole new generation of jargon into the mainstream of our battered language. SIVs (“Structured Investment Vehicles) are passe, giving way to CDO²; TARP (the “Troubled Asset Relief Program”) wound up requiring “quantitative easing — QE,” and all that stimulus has begotten a “sovereign debt” crisis, complete with PIGS and super-PIGS and even, if we’re all really unlucky, a hyper-PIG, too.

I hear you saying, “What in God’s name is he talking about?” In the interest of clarity (if not sanity or prudence), here’s an updated cheat sheet of the jargon d’jour:

Reality sucks

Let’s start with QE — quantitative easing. In theory, QE describes the entry of the Federal Reserve (or other country’s central bank) into “open market operations,” in essence, meaning the central bank has thrown the economic policymaking book out the window. QE features the Fed doing something successive Fed chairman vowed never to do: buying financial assets (like preferred stock in technically bankrupt banks) in order to pump money (or “liquidity”) into the economy during a liquidity crisis. (Remember when, in late 2008, major corporations suddenly couldn’t borrow money to keep operating? That’s a liquidity crisis.)

The simplest definition of QE is “printing money.” The Fed can do that, of course. But the Fed, being the world’s most important bank, doesn’t have to be that simplistic. For Ben Bernanke and his cohorts, QE is just a matter of moving some digits around to increase the amount of credit the Fed allows itself to draw on in its own huge account. (It’s as if you could just call your bank, tell them you’ve exhausted your line of credit, and raise the limit whenever you like — all while controlling the interest rate).

QE in the U.S. began in 2008 and has been practiced on a massive scale ever since. Having lowered interest rates to about zero and finding banks still wouldn’t lend, the Fed had little choice. The danger, of course, is that too much “liquidity” could eventually create inflation.

Outside the U.S., printing money isn’t so unusual. Japan has repeatedly intervened to save its “zombie” banks from the reality that many of them are bankrupt. And last month, the European Central Bank — notoriously loathe to do anything that might cause inflation (due largely to Germany’s long memory of its Weimar period) — faced its own brush with death due to the crisis over Greece and agreed to engage in QE by buying Greek government bonds on the open market. (The ECB denies that constitutes QE — again proving that reality often finds itself at odds with financial policymaking.)

PIIGS go to market

Speaking of Greece, another term now bandied about regularly is an acronym named for the four (or five — there’s a debate) most-likely-to-default-on-their-debts European countries: Portugal, Ireland, Greece and Spain — the “PIGS” (or PIIGS, if you include the deeply indebted Italians).

These countries have another thing in common other than fiscal recklessness: the euro. Because they all use the common European currency (along with more prudent places like Germany and the Benelux countries), their fates are intertwined. Thus, a financially irresponsible government in Greece — which barely represents 2 percent of the eurozone economy — has brought the entire edifice of European finance to the brink of disaster.

If you rank among the eurozone, the tottering deficits would stack up, highest to lowest in terms of percentage of GDP, like this: Greece, Ireland, Portugal, Spain and then Italy. That has led some Mediterranean nationalists to suggest that “GIPSI” would be a more appropriate tag. Apparently, political correctness went out the window with the Fed’s economic policymaking book in 2008.

I prefer PIIGS, myself — "porco" as the Portugeuese and Spanish would say. I find it a very accurate portrayal of societies that thought they could work, say, 30 hours a week, retire to a summer villa in their early 50s, laugh in the face of demographic decline and live off the fat of the Europe’s true "porco": hardworking Germans.

The Super-PIIGS

Before we Yanks get too smug about all this, remember that California (with a larger economy than any of Europe’s PIIGS except Italy) is nearly as bad off, and has a track record on fiscal and governance issues about on par with Greece (and a long way from, say, the Irish, who have shown they can take a fiscal punch and suffer through budget cuts for long-term gain.)

U.S. states, of course, can depend on Uncle Sam (or Uncle Ben, more accurately) to bail them out. But this offers no solace at the national level.

Right now, there are particular countries outside the eurozone which loom as Super- or even Hyper-PIGS: Japan, the U.K. and the U.S. Ranked with the third, sixth and first largest economies on the plant, the only reason these three countries aren’t facing the same problems “borrowing” to perpetuate their desire to spend more than they take in each year is that markets still consider them good credit (with “markets” defined as China, Saudi Arabia, the UAE, and other countries with cash-to-lend). A crisis in any one of these three — say, a major Japanese bank collapsing or a U.S. government shutdown over some budget-related dispute — could end that shell game. “Double-dip” just wouldn’t do justice to the mess that would ensue.

Money for nothing

“American ingenuity” is yet another reason we Americans should be a little sensitive to the EU’s current woes. Where would we be, after all, had Wall Street not been so free to engage in “creative destruction,” to borrow a term from a favorite GOP economist? Currently, the best example of this kind of creativity is subject to fraud charges by the Securities and Exchange Commission: the CDO “synthetic Collatoralized Debt Obligation – SQUARED!”

Yes, if you too were bored to death by the garden variety CDO, whereby Wall Street took thousands of mortgages and car loans and student loans and other impossible to value assets, bundled them into a single stinking link of sausage and then sold them back to you as “AAA” investments — well the CDO-squared is your solution. Not one, not two — but as many as a thousand separate CDO²; each of them teeming with God-knows-what financial botulism.

This wasn’t illegal, of course, just “creative.” The part that got the SEC upset was that Goldman Sachs, which ran one of the largest such sausage factories, hired an outside consultant to design it, then that designer (a hedge fund) laid down a huge bet that the whole thing would fail miserably, as it did. Goldman sold it as a good bet to many other clients, however, who took a beating in the hundreds of millions of dollars as a result. The SEC fraud case is pending, but you have to wonder whether something like this is better regulated by, say, the New Jersey State Gaming Commission.

If this all seems too complicated, don’t worry, Congress is in the final stages of passing financial reform regulations that will create new acronyms and impose rules that will spawn a new spasm of creativity from Wall Street as their lawyers and financial engineers figure out how to get around them. Stay tuned for the next installment, when we examine: “Regulatory Arbitrage.”