naked capitalism

By Richard Smith

Displacement activity: behaviour that occurs typically when there is a conflict between motives and that has no relevance to either motive: e.g. head scratching

- The Free Dictionary

…when the Ponzi pyramid financial scheme collapses we have a Minsky moment.

- Paul Davison

Abreaction: an emotional release resulting from mentally reliving or bringing into consciousness, through the process of catharsis, a long-repressed, painful experience.

- The Free Dictionary

From Reuters’ round-up of comments made at this year’s Jackson Hole beanfeast, here’s Angel Gurria, head of the Organization for Economic Co-operation and Development:

The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States…The signals that are coming out of the short-term discussions is, ‘We can’t even agree on about the time of the day, even if there’s a big clock telling us what the time of the day is.’”

Latest to point to the big clock is the IMF’s new head, Christine Lagarde, during a brief tour of US and European options in which she urged immediate action to deal with the risk that the economic recovery is being “derailed”. On Europe, she had this to say:

we need urgent and decisive action to remove the cloud of uncertainty hanging over banks and sovereigns. Financial exposures across the continent are transmitting weakness and spreading fear from market to market, country to country, periphery to core…banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.

ECB head Trichet, who was on the platform with her, didn’t like the reference to a possible liquidity crisis much

The idea that we could have a liquidity problem in Europe [is] plain wrong

…but with the Bundesbank and the normally quiet German President both now openly suggesting that ECB purchases of Spanish and Italian debt may be illegal, that probably isn’t the end of the story. For contrast, unnamed Eurozone officials, in this FT story, concede there have already been liquidity problems, and think Ms Lagarde is wrong about capital levels, too:

But officials said Ms Lagarde’s comments missed the point of banks’ current difficulties. “The key issue is funding,” said one experienced central banker. “Banks in some countries have had trouble securing liquidity in recent weeks and that pressure is going to mount. To talk about capital is a confused message. Everybody – politicians, regulators, other officials – is quite concerned.”

Officials, nervous that Ms Lagarde’s statement would further spook bank investors, said they planned to urge the former French finance minister to clarify her statement.

Not much sign of a consensus there, then. And a bit of plain speaking from Lagarde about the real problem gets deflected off into debates about liquidity and solvency and messaging: displacement.

Elsewhere we read that a former European Commissioner’s contention that Eurozone bonds are the only solution to the European crisis, and that Angela Merkel has ruled out the issuing of Eurozone bonds. Or again, the Greek rescue is now at risk because other countries have joined Finland in dickering about the loan collateral:

After Finland, four other small countries – the Netherlands, Slovenia, Slovakia and Austria – are calling for Greece to provide collateral for their share of the 109-billion-euro bailout, Kathimerini reports. Together with Finland, the five countries’ combined contribution amounts to 10% of the €109bn bailout. The separate agreement with Finland was subject of the discussions among finance ministries this Thursday.

This is all displacement: no one wants to recognize the losses and write off the debt, yet; not in Europe, (and not in the US, either, as we know well). There’s still too much room to argue about whether it’s liquidity or solvency, and about who should end up holding the bag, et cetera. Round and round it goes.

From a psychological point of view, it’s as if everything before the Minsky moment was displacement activity; the Minsky moment itself coincides with the onset of abreaction. Here, via email, is an little instance of what it’s like when you really run out of mental dodges; this is abreaction:

I had a convo last week with a guy that worked at a structured products advisory shop and he said that in late 2008 (post-Lehman) he was hired to look at a Landesbank’s books and when the representative from the bank asked him what this stuff was worth the advisory guy said he looked at the German and said “its all worthless, maybe a few pieces will perform in the long term but almost all of it is gone” and the German guy started crying and screaming at him…

Not the prettiest moment of enlightenment, but at least the Landesbanker got there in the end. Unfortunately the wait for an honest official confrontation of the public and private debt problems in the US and Europe is far from over.