Displacement Activity, Minsky Moment, Abreaction

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.


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  1. joebhed

    The debt-based money system of the world is a dead-man walking.
    You can make reference to the Minsky Moment when we sort of recognize that the ponzi-sheme of fractional-reserve banking, where debts are created out of thin air IN ORDER TO HAVE ANY MONEY, and then destroyed during the necessary correction, is actually the ROOT cause of this dilemma.

    You can quote the “THIS-way, no, that’s impossible, it MUST be THIS way” vacuous dialogue happening among the non-sovereign Euro-nations, leading absolutely nowhere.

    But only when the financialist intelligencia realize that there IS such a thing as the debt-based system of money, and that this monetary SYSTEM has resulted in this paralyzing debt-saturation will we begin to discuss the honest alternatives.

    It is quite simply, a new money system based on economic equity, a public money system where money comes into existence by virtue of economic necessity, and remains permanently in existence, as does economic necessity.

    On the Workings of a Public Money System of Open Macro-economics:

    That public money system has already been proposed by Congressman Dennis Kucinich:

    Or, let’s all continue to kick the can down the road and figure out how to have a new debt-jubilee, and start over again.

  2. Hansho

    Recovery will not begin until they start calculating how much is the real lost and what exactly is the nature of shadow banking asset and transaction.

    They still don’t want to face the fact that all those clever math (CDO, derivatives, currency hedge, etc) is too complex and can’t be calculated. They are still throwing money into the bottomless pit.

    At least Germany realizes this can’t go on. No amount of money printing can solve this. Because it will destroy any currency that attempt to cover this hole by printing. Obama is too stupid to understand this. He still go by that Keynesian bull, print enough money, it will grow the GDP again. (It won’t because all the money printing will be absorbed into the broken banking system. Nobody understand how the shadow banking works. And they will keep creating useless and complex investment papers. It is too profitable not to keep doing this crime.)

    1. Nick

      the banking system isnt broken, it just needs to be heavily regulated. complex instruments make it impossible not to engage in risky, over leveraged investments. perhaps disallow those instruments…humans are humans are humans and capitalists are capitalists are capitalists, any system will have holes in it because were all greedy as a species, we just need checks and balances.

  3. Foppe

    The other thing that Lagarde suggested in that interview was that the EFSF should be used to buy crap off the bank balance sheets (presumably at ‘myth’ value?)…

  4. Ian

    The liberating moment, what you term, “abreaction”, is also a recognition of fear, realized: the transformation of the defensiveness masking anxiety— hence, the earlier moment of displacement.

    Where we seem to be heading is to consolidate our anxieties in a plausible object of fear: to endure the collapse, to mourn, and to move on.

    Your Minsky Moment is its pivot

  5. Praedor

    “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…”

    Sheesh. These econ/banker/finance “guys” are f*cking pussies. Whiney and crybabying all over the place. Poor wittle baby, no more mansion or private jet or high-priced call girls or shitty/useless gazillion dollar shoes.

    Boo-f*cking-hoo. Pussies.

  6. Justicia

    The Minsky Moment has come but TPTB are like Wylie Cyote — off the cliff and treading on air.

    Today’s FT editorial is spot on.

    Lagarde’s ugly truth on debt

    Please respect FT.com’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article – http://www.ft.com/cms/s/0/fc7b53d8-d1a2-11e0-89c0-00144feab49a.html#ixzz1WQST7Cx8

    “Where the FT disagrees, is in Ms Lagarde’s willingness to allow taxpayers to act as unpaid lifeguards for the financial system – rescuing the banks if private investors will not. This shifting of risk from bondholders was a bad idea in Ireland and generalising it across the eurozone will not improve it. It would be better to fill capital holes by mandatory debt to equity swaps that put unsecured bondholders where they belong – behind both taxpayers and depositors.

    But if Ms Lagarde does not have all the answers she has at least started the debate. Now politicians need to show similar courage and look reality unsparingly in the eye.”


  7. /L

    Another memorable quote, to put to the collection, from Europe’s bellowed monetary despot Jean-Claude “Pangloss” Trichet:

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

    The idea that austerity measures could trigger stagnation is incorrect

    Austerity drives and deficit cuts would not choke growth but rather restore confidence

    Jean-Claude Trichet visiting Ireland 2004:
    “Thanks to Ireland’s economic success, to which you devoted your life, we can be confident that economic reform works.

    Structural reforms in capital markets should aim to allow a more effective allocation of savings toward the most rewarding investment opportunities

    there are solid economic reasons to argue that credible fiscal consolidation would boost growth in net terms, the so-called “Ricardian” effect being more important than the “Keynisian” effect”.

  8. jake chase

    This being a no news day provides an excuse to return to the recent post on Ayn Rand. Where she went wrong economically was in believing government taxation immoral. There is nothing immoral about taxing property, since only government’s monopolization of legitimate force protects it. Where America went wrong is in taxing income and then providing gigantic income tax loopholes for those owning and controlling property. Of course, it also went wrong in creating banking privileges and insuring licensed counterfeiters against failure. Now it seems determined to insure creditors at the expense of debtors. Doesn’t seem quite Christian, but of course they always find an excuse and cover it with altruistic bullshit. Those of you who are still confused should read Henry George- Progress and Poverty (1879).

  9. decora

    time for Jubilee!!

    i.e. we have already gone ‘halfway’, by wiping the debt off the books of the big banks, hedgies, etc.

    we shifted it to the taxpayers.

    now, lets go all the way, and wipe it off the taxpayers books too.

    it’s just a number in a computer somewhere. reset the bits to 0. not hard to do.

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