The Hazard of Moral Hazard

Thanks to Krugman for posting a link in this New York Times article and subsequent link to a white paper by Paul De Grauwe that outlines the systemic risks and solutions to the European Monetary union.

This is one of the best and most logical explanations I’ve read to the current European sovereign/banking crisis which has also lead the rest of the world to the precipice of another global recession. I believe the markets are abruptly trying to price risk in the face of a low probability highly disruptive outcome of a major (not Greece) European sovereign default. Nassim Taleb defined these events as Black Swans.

This paper explains why. Just like in the period from 2006-2008 there were people who saw the train wreck coming and were able to profit from it, there is a growing group of people who see the next train wreck approaching. Most of them are buying gold this time. The important part, however, is not what to trade but how to get our governments to take the blinders off.

If a few people make a pile of money as the world explodes, well they’ll be left behind to arm wrestle each other for every last Golden Eagle but they will be all alone.

krugman_75_twitter_normal.gifPaul Krugman (@NYTimeskrugman)
9/10/11 10:10 AM
Starkness Falls

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