A Couple of Lessons from Overseas

Sydney M. Williams

“A Couple of Lessons from Overseas”

February 9, 2010

The possible bankruptcy of Greece highlights the need, not only for fiscal discipline, but for regulation of the CDS market. Insurance provided by credit default swaps serves a useful purpose. It allows issuers, in some cases, to reduce their costs of borrowing. It brings, when properly regulated, a discipline to the market – a role played by short sellers in all markets. But an unregulated market, a market in which the value of the contracts may exceed the underlying securities they represent, offers the potential for financial mischief at best and disaster at worse. It is unconscionable that Congress, following the near collapse of AIG has allowed this market to continue unregulated.

While the European Union is a loose confederation of independent states, the problems of Greece have not gone unnoticed in the currency markets. Despite falling U.S. government yields, the Dollar Index is up 2.7% and the Dollar is up 3.5% versus the Euro so far this year. Nevertheless, at home, the problems in California, New York, New Jersey and other states – particularly those with powerful unions – highlight the risk of fiscal irresponsibility in our country. The problems of our states will get resolved because of the legal requirement that they balance their budgets, but that will not occur without pain, including the loss of services and jobs.

Last week, President Christina Kirchner of Argentina dumped the president of the central bank, naming Mercedes Marco del Pont to the job; she is a Yale trained economist who has expressed the view that the bank should be subservient to the executive branch – indicating her willingness to finance the President’s socialist agenda. Mrs. Kirchner has taken her play book from her neighbor to the north, Hugo Chavez. Her desire to have her and her husband stay in office has led her to favor government spending – at a rate far in excess of revenues, the mark of a good socialist. Last year, inflation was 17%. Prospects for this year look worse. Increased taxes have discouraged investment and export taxes are leading to protectionism. The future looks bleak.

The lessons from Argentina (and obviously Venezuela) are twofold. An independent Federal Reserve is critical to the well being of our financial system. While in our country the chairman is appointed by the President and confirmed by the Senate, he must, to do his job well, ignore changing political winds. Secondly, Argentina is a prime example of the risks of too much government intrusion into the economy. In times of distress, socialism looks like a comfortable remedy. History suggests it does not work.