Latest Stories

• Bill Gross Talks eSolar
• Apple, Wal-mart, and the “Market Capitalization Bigger Than” Thing
• Michael Lewis on 60 Minutes
• Readings: Water, Flu, Debt, Bubbles, Airports, etc.
• Matt Simmons: The Oil & Water Mix

 

Social/Locational Networks in Contagious Criminality

Fascinating new paper out looking at social/locational networks in criminal contagion:

Even in a sprawling city like Los Angeles, crime still clumps together. Mathematical models of burglars ... show that these so-called crime hot spots form when previous crimes attract more criminals to a neighborhood. By understanding how these blobs form, researchers hope to help police departments break them up. 

Like a scratch on a glass that seeds a crystal, crime tends to clump when roving criminals home in on certain cues in a neighborhood. A broken window from a past burglary, for example, suggests that houses in the area may be easier to break in to, or sprawling graffiti might mean residents aren't very vigilant.

 

Weekend Reading: Florida, Las Vegas, California, Greece, Breakfast, etc.

A few links from my weekly weekend reading column over at TheStreet:

• Fast-food breakfast sales decline as fewer head to work (Source)
• The future of public debt: prospects and implications (Source)
• (Source)
• Schwarzenegger Says Economy Shows ‘Signs of a Comeback’ (Source)
• What’s Next? Judging Sequences of Binary Events  (Source)
• Casinos lost money in 2009 for second time in history (Source)
• A parable about how one nation came to financial ruin (Source)
• Is K.R. Sridhar’s fuel cell ready for prime time? (Source)
• Florida’s First Population Decline Since 1946 Squeezes Budget (Source)

 

Mauldin: Germany, Greece, Spain – and the U.S.

John Mauldin’s latest: Taking things past Greece to issues in Germany, Greece, Spain – and, the U.S.

Germany, Greece, and Spain

Let's start with a little theater of the absurd. Quoting from a Reuters story (you can't make this up!):

"Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticizing the country over its yawning fiscal deficits.

"How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?" Margaritis Tzimas, of the main opposition New Democracy party, told parliament."

This was during a debate in the Greek parliament on how to handle the Greek debt. And it was echoed by both the left and right political parties. Somehow they forgot about the German government paying 115 million deutschmarks in 1960, not a small sum back then. It seems that many Greek politicians are still in the denial stage of dealing with this crisis.

Read the rest of this entry »  

Turn on the Light, and Watch the Bankers Scurry

Informative graphic out based on LinkedIn data showing how bankers/traders found new employment during the system collapse of their former employers in 2008. Look at the figure from top to bottom, appropriately enough.

One hypothesis is that many of the employees left the financial industry.  According to the LinkedIn data set, that just isn’t true. There are a handful of people that did transition to other industries and start new careers, but most stayed in the financial space. To be specific, other than two acquiring companies (Bank of America acquired Merrill Lynch and Nomura acquired Lehman Brothers’ franchise in the Asia Pacific region), Barclays was by far the biggest beneficiary, scooping up 10% of the laid off talent, followed by Credit Suisse at 1.5% and Citigroup at 1.1 %.

[via LinkedIn]

 

Re-litigating the Simon/Ehrlich Bet

At last week’s TED 2010 conference in Long Beach, California, I gave a short talk about what I called “the most important bet in history”: the Simon/Ehrlich bet on commodity prices. This year marks the 30th anniversary of that bet’s start date.

By way of refresher, the situation was this: After a decade of soaring commodity prices, plus related worries about resource scarcity, in 1980, Paul Ehrlich, a dour population ecologist, took up Julian Simon, a cornucopian economist, on a bet. Ehrlich (on paper) put equal mounts of money into five commodities (he selected chromium, copper, nickel, tin and tungsten) whose prices would, he thought, be higher a decade later. Higher prices meant Ehrlich won; lower prices meant Simon won. The loser paid the winner the difference.

Ehrlich lost. A decade later, in 1990, all five commodities' prices were lower than they were in 1980. Unhappy at the outcome, Ehrlich complained that he hadn’t really wanted to bet on commodities in the first place. He offered Simon a new and more complex series of decadal bets – including things like carbon dioxide, AIDS prevalence, area of viable farmland, and so on. Simon turned that bet down, comparing it to betting on a football field’s condition rather than on the game’s outcome. There never was a second Simon/Ehrlich bet, and Julian Simon died in 1998.

The bet changed economics and the environmental movement.  It made the former even more insufferable than usual, convincing many economists of the god-like power of price in bringing new supply and substitutes in commodity markets. At the same time it made environmentalists jittery, introducing overdue doubts about the entire idea of resource scarcity. If raging population and economic growth don’t cause important resources to be depleted, what will? Today, twenty years after the bet’s end, and three decades after its start, the Simon/Ehrlich bet’s outcome is still widely-cited (just try to bring up “peak oil” with a Chicago-school economist, go on – I’ll wait), even if the bet itself is understood only in superficial terms.

Given its 30th anniversary, and with commodities in the news – especially oil – I thought it was an apropos time (and TED an appropriate venue) to revisit the bet’s context, outcome, controversies and implications.

Without getting into it too deeply, here are some things worth knowing. Given the above graph of the five commodities’ prices in inflation-adjusted terms, it will surprise no-one that the bet’s payoff was highly dependent on its start date. Simon famously offered to bet comers on any timeline longer than a year, and on any commodity, but the bet itself was over a decade, from 1980-1990. If you started the bet any year during the 1980s Simon won eight of the ten decadal start years. During the 1990s things changed, however, with Simon the decadal winners in four start years and Ehrlich winning six – 60% of the time. And if we extend the bet into the current decade, taking Simon at his word that he was happy to bet on any period from a year on up (we don’t have enough data to do a full 21st century decade), then Ehrlich won every start-year bet in the 2000s. He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.

So, what does all this mean? A few things. First, and most importantly, it means Simon was right but fairly lucky. There is nothing wrong with being lucky, of course, but compulsive Simon/Ehrlich-citers need to be reminded that it is no law of nature (let alone of rickety old economics) that commodity prices (inflation-adjusted or otherwise) trend inexorably downward, even over a decade. Yes, high prices will usually mean low prices, because of substitutes, changed behavior and new supply; but you could equally argue that low prices will mean high prices, especially given rapid population and economic growth globally. In the interim, the volatility – price spikes and price collapses – can break you, whether you’re a commodity trader or merely a user of said resource. It is of precious little use to know that one day prices will be lower if you don’t survive the period when they’re higher.

And that brings us back to oil. As the cliché goes, the oil age will end before we run out of oil, but, cleverness of the construction aside, that phrase is pointless and should be retired. The important thing is not whether the oil age ends, because it will, or whether we will run out of oil, because we won’t; it is how we get from here to there, both in economic and in societal terms.

In the coming years, assuming we don’t sink back into economic depression, energy markets will repeatedly probe big oil buyers’ elasticities of demand – how do you like that high price? yeah, how about this higher one? and this higher one yet? – until it finds a price where supply and demand match up such that inventories rebuild from recent nervousness-inducing levels. That elastic buyer is, for practical purposes, the U.S. – it is the largest per capita buyer of market-priced oil: neither heavily taxed nor subsidized – which means that energy market’s price spikes will hit here hardest over the next few years.

Once the market breaks the largest and most elastic buyer’s back, which it will, whether smoothly or through ugly societal and economic disruption, prices will decline in a way that would have made chipper cornucopian Julian Simon even happier than usual. But you/we/I/them/us have to get there first. And that requires thought and planning, not just the ritual incantation -- “Yeah, but Julian Simon’s bet showed that …” – of a smart but lucky economist’s name.

 

Bill Gates Goes Nuclear on TED

I enjoyed Bill Gates’ talk on cheap(er) nuclear power at last week’s TED conference in Long Beach. The full presentation is now up on the TED site.

 

Adventures in Airport Morning Security Theater

The absurdities of security theater continued today as I crossed back into the U.S. from Canada. Security rules mean you have to get to the airport two hours before departure, which meant leaving the hotel at 6am for an 8:30 flight. I got there, printed my boarding passes and prepared to go thru the first of, I think, thirty checkpoints at which someone checked to see if my boarding pass had aged at all since someone checked it thirty seconds earlier.

Having cleared that initial carbon-14 hurdle, I hit a new hurdle. Checkpoint guy 1B says, “What’s that on your shoulder?”

I say, “My laptop bag”.

“You have too many bags”, he says.

“But”, I say, “I only have my laptop bag and my roller bag, both of which fit”.

“Too many bags. Check one”.

I splutter a little. “I just crossed into the U.S. in Toronto a few weeks ago and they had all the new post-underwear guy rules, but they let me bring the roller bag and laptop bag”.

“They may have different rules in Toronto. These are our rules here,” he says.

Great. I turn around and go check  my roller bag. Fine. Montreal has different luggage rules than Toronto. Stupid, admittedly, but it wouldn’t be the first time, even if it’s also nonsensical.

Roller-bag checked, I’m back in the security line. A half-dozen uniformed people in random places look at my boarding pass paper to see how it is aging – all clear, praise to Abitibi-Bowater – and make it to the next stage in security: the scanner part of Security Theater.

First I am asked to step on a rubber mat, while on which someone asks me if I’m on a connecting flight. Surmising that if I say “No” that I’ll be put in another, longer line to my left, I say “Yes” -- I reconcile that to myself by telling me that I do have two flights today, so I am connecting, even if, temporally speaking, the connecting part is still in my future.

I am then put in a new line where a bunch of people, many with two bags – women with body-bag-sized purses plus laptop bag; men with sad and squished suitbags plus laptop cases – get ready for the next bit of theater. We must demonstrate that we are none of the incarcerated people that previously menaced airlines, and are therefore unlikely to do so in future (i.e., we take off shoes, submit to a pat-down search, and surrender bodily fluids).

Not being good at keeping to myself, I ask why other people have two bags while I was forced to check one. “Different people have different rules”, one fine fellow tells me, “Like in the same airport?”, I irritatedly asked, pondering the intricacies of regulatory microclimates. He whoompf-shrugs in that Gallic way, and I’m left to myself. Upon his return he probes me intently about having a first-generation iPhone -- “You don’t want the 3GS?” – and, my tech late-adopter status clear, he dismissively sends me on my way.

A few dozen more people check how my paper pass is holding up. All looks good. Abitibi-Bowater makes such wonderful paper. Now, however, I have a secret. I am a member of Nexus, a fast-crossing program for getting around the long security lines into the U.S. You just stare into a retina-scanner – one that always insists I need to move more to the left, which for some reason usually makes me go cross-eyed, thus causing the machine to demand I go further left, etc. – and are given a yellow pass. You then zoom insouciantly past the unwashed traveling masses queued up to answer questions and have the quality of their boarding pass paper checked.

The trouble is, that didn’t happen. My friendly border inspector guy raised his hand, flagging me for random inspection. Me? Again? “We check Nexus passholders on a random basis,” a fine and upstanding young fellow told me as he asked for my boarding pass to see whether there had been any paper degradation. (All good.) “Not that I’m objecting,” I said, “but I don’t feel all that random.” Statistical pedantry overcoming me, I continued, “I have had this happen 20% of the time when crossing. Given the number of people with Nexus passes, and given how few people are ever in the secondary inspection lounges with me, this can hardly be random.  There is a sampling issue.” He ignored me, handing my boarding pass to another fellow who immediately checked for paper problems. This stuff is more resilient than the Dead Sea Scrolls. Whew.

Now, I sat in a big empty room. Just me. Okay, one guy at a counter, plus twenty empty chairs and me. I sat in the middle of the room, just so that my OCD compulsions with respect to symmetry were satisfied, and waited. He spindled my boarding pass for a few more minutes, undoubtedly doing complex paper tests using equipment unavailable to the other three or four dozen people who had already checked for incipient paper degradation. “You’re good,” he said, handing me back my boarding pass and sending me to two more people who checked my paper quality yet again. It was still okay, having somehow survived this airport stress-testing program.

Time before flight that I arrived at airport? Two hours. Time before flight that I made it to gate? 20 minutes. Number of times Abitibi-Bowater was shown to make the most awesome boarding pass paper in the world? Too many to count.

[Update] To add to the entertainment, United lost my luggage that they forced me to check because of their bizarre and unpredictable rules.

 

How Oil Puts the Planet on Tilt

There is a fascinating new paper out describing how rapid oil & resource extraction may be changing how the earth spins. That, in turn, could influence weather.

Read on for the paper’s summary. The paper itself is being presented this week at the AGU Chapman Conference on Complexity and Extreme Events in Geosciences in India:

Consequences of Fossil Fuel Extraction on the Climate Change of the Earth

The understanding of the causes of climate  change of the earth is a very complex process. It can not be explained on the basis of one or two factors because it is governed by the various processes going  on for a long time in the solar system. We are creating more complexity in the climate change by ruthless exploitation of natural resources of the earth  which is resulting in the climate change at a faster rate. The climate change such as global warming due to burning of fossil fuels, i.e. coal, minerals, gases etc. is very well  reported  in the literature, but very little work has been done on the contribution of the  extraction of fossil fuel from the earth’s crust, in changing various physical properties of the earth, affecting the climate of the earth. 

The extraction of fossil is a very old practice but for last 6-7 decades, it has increased very rapid. The imbalance between extraction and generation of fossil fuel is increasing day by day, which is changing the climate, of the earth in a different way. The change in the mass of the earth due to the extraction of fossil fuel from the earth’ crust, is changing the moment of inertia of the earth because the  extraction  is at the farthest distance from the axis of rotation. Thus a small change in the mass in the earth crust will affect the moment of inertia substantially. In order to conserve the angular moment ( L = IW), the angular frequency of the earth on its own axis as well as around the sun, must change. On the other hand the extraction of fossil fuels may not  be uniform throughout the earth, as the extraction  in northern hemisphere is reported to be  much higher than in southern hemisphere which may cause weight imbalance around the axis of rotation of the earth as well as around the sun. This may result in the change of the angle of tilt of the earth. This change in the tilt may be a very important factor, contributing in changing the climate at various places of the earth. Thus,  the extraction of fossil fuels may contribute to the  change in  various mechanical properties of the earth,  making the process of climate change such as global warming more complex to understand.  

We shall  give an account of  the change in the physical properties of the earth  rotation such as moment  inertia and angular velocity resulting from the extraction of fossil fuel and  predict its impact on climate change of the earth.

I haven’t read the whole paper, so I have no idea how credible the maths are, but I do dig the heroic banging together of oil, complexity and the earth’s angular momentum in a single paper.

 

Readings: Money Illusion, Taibbi Strikes Again, Quants, Goldman, etc.

• Wall Street works a bailout hustle (Rolling Stone)
• U.S. economy grinds to halt (The Onion)
• Quant number-crunchers get crunched (The Economist)
• Goldman Sachs and the mouth of Sauron (ED)

 

Father of the Euro Talks Euro Trash

From Bloomberg Television, economist Robert Mundell talks euro trash:

 

Readings: David Cameron, Cynical Deficit Hawks, Math, Credit, Immigrants, Sports, etc.

• Money’s too tight to mention (Economist)
• David Cameron on the next age of government (TED)
• Deficit hawks want double-dip recession (RItholtz)
• Europe’s slow, painful death (Spectator)
• Which immigrants are most innovative and entrepreneurial? Students (CEPR)
• The unintended consequences of mathematics (BBC)
• Athlete atypicity on the edge of human achievement (PLoS)
• Near record warmth in Vancouver during Olympics (Wunderground)

 

Krugman: What Have Learned From the Crisis, If Anything?

Economist Paul Krugman speaking recently at MIT about the financial crisis of the last few years:

 

Martin Wolf Spanks Niall Ferguson

In his latest column, the FT’s Martin Wolf spanks historian Niall Ferguson for his recent column equating Greece and the U.S. Here is the money ‘graph from Wolf’s latest:

If these governments had decided to balance their budgets [in 2009/2010], as [Niall Ferguson and] many conservatives demand, two possible outcomes can be envisaged: the plausible one is that we would now be in the Great Depression redux; the fanciful one is that, despite huge increases in taxation or vast cuts in spending, the private sector would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. This is to believe in magic.

More here.

 

The Future of Public Debt

From a new BIS paper on the future of public debt, some lucid and helpful musings on the entitlement mess on the other side of the current sovereign debt explosion in OECD countries:

 

Greece: Our Debt, Your Problem

Good insider-y and cynical reading on Greece's debt non-problem problem that has been making the rounds, allegedly written by an anonymous in-country banker:

GGBs: Our debt, your problem.

If Greece defaults, it will be the biggest sovereign default in history. If Greece is bailed out, it will be the biggest sovereign bailout in history. That's what you get when there's EUR 250 billion at stake. The Russian and Argentinean defaults, both south of EUR 60 billion, were not even a quarter as big. Thing is, as a Greek I'm as worried about the whole thing as a resident of the fictitious "South Sea" would have been when the South Sea bubble went bust. Here's why: Debt is not dealt with very well by economic theory. Debts net out. For every lender there is necessarily a borrower.

Total wealth is the dollar amount it takes to control every home, every corporation every consumer durable and every privately owned resource. No mention of debt here (though if you want to get difficult, you will point out that to control a corporate you need to own both its stock and its debt, but bear with me) Thing is, if you add a bit of debt, you untie a lot of agents' hands. If a 35 year old heart surgeon has access to the mortgage market he can move into a beautiful house before he collects his first ever paycheck, and he's definitely good for the money.

That pushes up home prices. So a bit of debt definitely pushes up total wealth. On the other hand, recent experience indicates that a whole lot of debt leads to breakdowns. If we've all borrowed money to buy assets and for some reason they take a break from going up, marginal borrowers who count on selling appreciating assets to service interest on their debt will miss their payments. Their liquidator will sell their assets. This will drive down asset prices, which in turn will trigger margin calls to more people and the vicious cycle can start that Irving Fischer dubbed debt deflation. 2008 looked a lot like that and most people believe it had a lot to do with overindebtedness.

We also need to look at savings. If a country has a lot of savings, it can support a lot of debt. Japan has massive government debt, but equally massive private savings. Some countries, like China have massive savings and have to look abroad for investments. And some, like the US are the other way round. When it comes to debt, Greece is in a uniquely privileged situation. No, seriously! For starters, we Greeks are some of the world's richest people.

On the official statistics alone, we are comfortably in the world's top 40 for per capita GDP. But that's peanuts. Lest we forget, that's our declared income. Don't quote me on this apocryphal statistic, but I'm reliably informed that exactly six Greeks declared more than a million EUR in income last time anybody counted. And exactly 85 declared more than half a million. So we're probably a bit better than top 40.

Either that, or this trading floor alone has more rich people than Greece. Hell, our new recruits for this season alone could probably do it. If you have any doubts about Greek wealth, check out on Bloomberg the balance sheet of the National Bank of Greece, Eurobank, Alphabank and Piraeus bank, the top four. The four of them alone command EUR 164 billion in deposits! Slightly misleading, since they all have operations in the Balkans, but that's almost one GDP, lying in deposits!!! More to the point, how many Greeks do you know who keep their money in Greece? That's merely our spending money, it's a small fraction of our savings and assets. Don't even mention that a square meter costs less in Belgravia than in Psychico, Philothei or Kifissia.

Bottom line, as long as Switzerland and Citibank are going concerns (for that is where we keep the bulk of our savings), we're loaded. Second, Greece scores well across all measures of debt but one:

We have extremely low household debt / GDP ratio.

We have extremely low corporate debt/ GDP ratio.

We have extremely low bank debt/ GDP ratio.

We have a manageable total debt / GDP ratio. Half that of the UK or the US!

We only score poorly on sovereign debt / GDP ratio.

That's it!

Greece is a country with rich, underlevereaged savers, underleveraged corporates and a healthy banking system whose government happens to have borrowed a hell of a lot of money. But the world has grounds to be scared: with rates at 5% and government debt comfortably above 100% of GDP, servicing that debt costs 6% of GDP at the moment. GDP growth, in the meantime has not touched 6% nominal in a long, long time.

So here's the deal: No matter what happens, the debt is now at a level where its growth has reached escape velocity. Even if Greece were to run zero deficit, ultimately we are heading to default. We can default now or we can default later. Is that a big deal? Frankly, no. 75% of the debt, probably more, is held externally. If JGBs fail to pay coupon, that's a disaster for Japan, since 95% are held domestically. If GGBs fail to pay coupon, it's far less catastrophic. For the debt-deflation spiral to start, you need the debt to be internal.

With an alleged 216 billion held by foreigners (plus the recent 8) the contagion risks mainly lie outside the border! Even the banks who are in the news for holding all those ECB-funded GGB's aren't as long as US banks are long Treasuries, for example, though they would probably have to be restructured. Basically, the economy is paying 5% or even 6% of GDP to service a debt whose failure will hurt three or four times more abroad than it will in Greece. Do I look worried?

Supposing we default, what will be left is a AAA credit here. Give it five years and a line will form to our door to lend us more. It would not be fantastic for us to default, granted, because at the moment we are in a virtual reality where a bunch of greedy foreigners lend us a fresh 5% of GDP every year on top of what they were lending us the year before. If we default they won't lend us again for a short while. During that period we will have to live within our means. That will be a haircut. But it won't be a catastrophe for Greece. Germany took a bigger GDP hit than that last year, for example, and so did the UK!

Indeed, I'm willing to bet Greeks continue to have good access to the international financial markets, and here's why: as I'm writing this, Greek shipowners owe some EUR 100 billion to the international banking system.

Even with the Baltic Dry somewhere in the dungeon, this debt is being honored and serviced. Greek companies will be just fine, basically. It's the government that is the joke here, not the country! Nevertheless, a sovereign default by Greece will set off a cascade. Italy has tons more debt than Greece and a much bigger proportion of it is held in Italy.

That won't be a picnic. It gets worse than that, of course. People like to talk about PIGS, but the real oink oinks of the past decade have resided in the protestant part of the world. The United Kingdom and the US have total debt of more than 400% of GDP. You can never grow your way out of 400%, it's as simple as that. And this concludes my first point: be careful what you wish for here, because Greece is a rich country that will mainly hurt others if it defaults. Directly (through the default) and indirectly, via contagion.

A default will have both negatives for Greeks (less money to spend) and positives, which don't concern anybody here, so I will discuss them separately at the end of this piece.

This brings me to my second big idea here. When the Paulson / Bernanke / Geithner triumvirate decided to save the banks in September of 2008, who exactly was saved? Was it the American economy, as we are led to believe? What was the alternative? The establishment would have us believe that there was no alternative.

It was "hold your nose and save Wall Street" or a return to the dark ages. As Joseph Stiglitz, Willem Buiter and Paul Krugman were at pains to point out back then, an alternative existed: we could have done a GM/Chrysler on the banks. Expropriate the equity holders, pay 15 cents on the dollar to the bondholders and nationalize. Had we gone down that route, there would have been different winners and losers. Small business would have been a massive winner.

Rather than create zombie banks that are too busy pretending Ford is a great company (Ford owes banks 24 billion) and commercial real estate is about to turn a corner, they would carry on extending credit to small business. Sticking money into the zombies has had 100% the opposite effect of what was advertised. It has caused "extend and pretend" to the borrowers who are too big to fail and has throttled the little guy. Business was a loser.

The newspapers have us think that bankers were the winners. We did not do too poorly, but we are not the big winners. The big winners here are the baby boomers. That's because they have their name against some 80% of the value in all pension funds and insurance policies.

And if the banks had gone down, that's who holds their debt and much of their equity. Bottom line, had the banks gone down, no insurance product would be worth a penny more than the paper it's printed on. So basically, the 2008 bailout sacrificed business, i.e. our generation, but saved our parents. The US bailout was intergenerational transfer, pure and simple. Now, our parents did not have enough kids.

The past 10 years has been the story of their struggle to sell us their homes and their equities at the price that will allow them to retire conveniently as they turn 65. They've thrown low interest rates at us to induce us to borrow against the homes they are selling us, but that backfired because low rates have pushed down their bond returns and their dividends. And their stocks have not gone up in ten years. The final straw was going to be the decimation of their insurance contracts and pension plans, but Paulson, Bernanke and Geithner jumped in and saved them.

Talk about the bankers is fashionable, but in the bigger scheme of things it was a side-show. It's pretty much the same with the Greek situation. Yes, we Greeks have been naughty. Yes, we are overindebted. Yes, we live above our means. But, much like the evil bankers, this has nothing whatsoever to do with Greece. That is my main thesis here. The Greek saga (for I refuse to see it as a tragedy) is all about saving the French and German baby boomers' retirement.

Sleepy fund managers and insurers in the north of Europe decided that they did not want currency risk and they did not much fancy credit risk. Sovereign risk denominated in EUR was just the ticket for them to deliver on their promises. So the decision was made to lend money to the Greek government. Tons of money. Leaving out wars, more than any country has ever paid back that escaped default. Greece had no need for this money and indeed put it to horrible use. But Greece is not the protagonist here.

This is a domestic issue for France and Germany! The governments of France and Germany have a choice here. They can side with the baby boomer generation, tax its progeny and funnel the money to Greece. Or they can refuse and have the baby boomers reap what they've sown. But the bottom line here is that if the money had not come to Greece it would have gone to Italy, Spain or Portugal. It wouldn't have gone to Bunds and OATs, because they did not yield enough for these wide fund managers' taste.

The goings on in America, where nobody is thankful for having been "saved" and where the economy is suffering the result of a misguided, short-term decision may push the French and German government to say "the Greeks don't deserve a bailout" and allow their insurance behemoths to take the hit. But I would not bet on it. My money is that the baby boomers prevail again! Make sure you've covered GGB shorts by the end of the week!!! I, for one, hope we're allowed to default, and here's why: Once upon a time, Greece was a model small democracy. An extremely frugal government ran tight budgets and provided an extremely basic safety net, and truly threadbare services for a very low cost: Tax collected was minimal.

While tax rates may have been high, collection was virtually nil. A small oligarchy was the only source of capital and had the acumen, education and experience to deploy it as the country developed. Old families controlled the steel, cement, foodstuffs and construction companies that rebuilt Greece after the war. As recently as 1980, debt/GDP was at 30% and it would have been much lower were it not for the high costs of defense. When Greece joined the EU in 1980, all that changed. It was party time. Money that was sent to build the Greek infrastructure was funneled pretty much directly into the pockets of the oligarchy as well as the new Socialist oligarchy that emerged.

This was not chump change. It was 6% of GDP for 30 years. With the exception of farmers, who did extremely well off of the Common Agricultural Policy, the rest of the money went pretty much straight to Swiss bank accounts. As an example, Greece has paid 250% over list for F16's and Mirage fighters and has spent EUR 750 million for an airport that was built by the same company that originally bid EUR 220 million for the project. No prizes for guessing what happened there. Once the addiction to easy money set in, the government of Greece was transformed from a lean provider of defense, basic health, basic education, a basic road network and extremely basic pensions to an auctioneer of projects to the oligarchy.

The families who control business in Greece used a system of bribes the government was happy to accept and set up a newspaper each to deliver threats its members would rather not. Sticks and carrots, and lots of Euros. And once the system was established, there was no need to stick to the money that was coming from the EU. ERM entry cost our politicians the printing press, but thanks to low EUR rates, the government could now service previously unthinkable amounts of debt with impunity. A residual part of that money may have ended up in useful projects, but the bulk ended up in the pockets of the twenty families who run Greek business.

A big chunk of that money, in turn, has been invested by these families in bringing to Greece every foreign franchise from Starbucks and Pizza Hut to IKEA and Stanley Kaplan, driving existing companies out of business in the process. In summary, EU funds have done to Greece what oil did to Nigeria, while low EUR rates have allowed the government of Greece to be able to service a debt of 100% of GDP, most of which has gone straight to the pockets of the oligarchy. Man on the street, with the exception of the farmers, has not benefited one jot. This does not make all Greeks poor. Shipowners do very well, and a natural resource called the sun is very helpful to our 165,000 hoteliers. Man on the street never saw the benefit of the 250 billion the government has borrowed. Ergo, support for austerity now that the bill has come is zero. You won't see anybody accept an Irish solution in Greece.

The notion that Brussels will dictate to Greece terms on public sector wages and impose a May deadline are, frankly, comical. The government may like the idea, but the entire population will probably go on strike. Needless to say, Greece can pay. If the government chooses to freeze savings accounts it can pay the whole kahuna in one go. But the Greek people will refuse to take any hardship. This is a matter between some French and German baby-boomers, their government, and twenty Greek families who will happily take more. I hope we default and the country is freed from the curse of free money that befell it in 1980. Once our politicians have no more money to disburse to the oligarchs, we can start to be proud Europeans.