"Greece - Don't Blame Speculators"

Sydney M. Williams

Thought of the Day

“Greece - Don’t Blame Speculators”

March 10, 2010

Growing up on a small farm in New Hampshire, I was witness more than once to the fact that a wounded chicken would be attacked by his or her healthy companions. The fate was death. Mr. Papandreou would have us believe that Greece is that sick chicken and that speculators represent the healthy flock. Nothing could be further from the truth. First, blaming speculators is as erroneous as a drunk blaming the producers of scotch for his misbehavior and, second, Mr. Papandreou needs those speculators to buy his bonds, for if a Greek bond is not a speculation I don’t know what is.

Blaming short sellers (or buyers of CDSs) for their woes in times of crisis is a time-honored custom in an America, with its optimistic demeanor and its face turned toward the future. But the facts are that short sellers have done more to uncover fraud and to keep corporate (and governmental) managers honest than any regulatory body or rating agency. Are there nefarious short sellers motivated purely by self interest and willing to step outside the law? Of course. There are criminals in all parts of life, including all aspects of the investment community and, as we have all learned recently, in government.

I have had my beef with the dark corners in which many derivatives operate; permitting sunshine in would be healthy for all concerned. There should be a central clearing house for these products. I also believe, in terms of the Credit Default Swap market, that the amount written against any specific issue should not exceed the size of that issue, but for Mr. Papandreou to blame the industry for the mismanagement of his country’s economy is demagogic and dangerous. As Ireland is learning (and described well in this morning’s Wall Street Journal), the only answer is a painful retrenchment – a lesson not yet learned in our own state of California!

Expanding debt, particularly at the consumer and financial industry level, drove the economies of the developed nations over the past ten years. During the last decade, growth in debt greatly exceeded growth in GDP. Like an addict, the detoxification process will take time and involve sacrifice; there is no easy way out. Government has stepped in, but hopefully only to temporarily ease the pain and not to turn the crisis into an opportunity to permanently expand government. Growth, when it returns in force and if it is to be sustainable, will have to be driven by the private sector. Exports have become the expected avenue for growth. The problem is that not every country can run a surplus in foreign exchange. Someone must run a deficit. It could be that developing and emerging nations will assume that role, but that suggests a tectonic shift.

As to whether Greece, as Professor Ken Rogoff of Harvard has forecast, is but prelude to a series of falling dominoes, I don’t pretend to know; though I agree with Jeff Saut of Raymond James who yesterday on Bloomberg said, “It’s usually not the snake you see that bites you.”

The common denominator in the on-going credit crisis is that blame has gone around the table like a hot potato. Banks, as the easiest target and a natural foe of populist politicians, have become the visible victim. Notably absent have been mea culpa’s from any of the participants – politicians, bankers, regulators, rating agencies and consumers. And what is true in the United States is true in other parts of the world, recently and most notably in Greece. The German poet, Friedrich Hebbel, once said: “Whoever wants to be a judge of human nature should study people’s excuses.” Today, candidates for such a study are in surplus.