Credit and Credibility

Are banks crazy or a cartel?

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When a government (let us say, in Athens) could possibly renege on promises made to banks who loaned them money or bought their bonds, which that government is unable to fulfill without draconian cuts to public services, all right-thinking people attack the feckless politicians and threaten a collapse of confidence and the world economy. This is a DEFAULT! Other governments and the IMF might jump in to pour money into the state coffers, on the condition that they flow out the other end into the investors’ pockets.

But when a government (could be in Athens, or in London, or for that matter Madison, Wisconsin) has made promises of pensions to government employees, but has failed to fund them adequately, it is short-sighted and greedy for these civil servants to insist on these promises being honoured.

Why is a default such a terrible thing? Because, they say, if the country defaults on its debts it will be shut out of the credit markets. Hmmm. Let’s suppose it is true. Why? Suppose you own a bank, and your thinking of lending to one of two countries, let’s call one of them Piigsia and the other Sameria. Both are heavily indebted. Piigsia introduces crushing austerity measures, while Sameria repudiates its sovereign debt. Which of those countries would you rather loan your bank’s money to? The one that’s shown a great willingness to pay off its debts but is financially crushed, or the one who may be more likely to try to weasel out of its debts, but is eminently capable of paying. Solvency is not merely (or even primarily) a state of mind. I mean, what good is it to have the current government express a willingness to pay off its debts, knowing that it’s likely to be punished by voters for these “good” intentions? Maybe they just don’t want to be serial defaulters, so having avoided defaulting this time will encourage them to default on the next batch of loans.

As for Sameria, it sucks for the other banks that have lost their money, but why should I give up a chance to make a good profit for the sake of punishing Sameria for hosing my competitors? In fact, in a competitive market, why shouldn’t I be happy that my competitors have made a loss, and just try to get better conditions for my loan?

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Where the money is…

Mathematical finance as an accessory to crime

Not long after I finished my PhD in probability theory, a significant fraction of the field was devoured by the financial mathematics moloch. Particularly in Europe, probability theory positions disappeared, to be replaced by openings in financial mathematics, which either went unfilled or cycled among a very few senior researchers and a few quick-change opportunists (and, gradually, their fledgeling academic progeny).

Everyone felt they had to get in on the action, and of course there was a certain amount of positive feedback. When many jobs chase few graduates, it generates huge demand among students for training in such a demonstrably burgeoning field. Obviously, the academic feedback was limited by the fact that most of the eager young ‘uns were seeking employment in banks, not in academia — but the banks were hiring as well. Anyway, just about 10 years ago, a Dutch colleague asked me if I might be interested in joining his own institute’s planned financial mathematics group, for which they were proposing to create TEN new positions. My reply was that finance did not interest me as a topic of research, but I added that there was something unseemly — bordering on unethical — in mathematicians’ headlong chase after banking lucre. The current generation of mathematicians is the trustee of a vast and powerful system of analysis, whose creators were supported, honoured, and financed by public institutions. What is it but a crime, when we abscond with the fruits of this scholarship, and sell it off (cheaply) to banks, who will use it to extract billions of dollars from financial markets? Continue reading “Where the money is…”

The agony and the equity

There was a time when the British, like their American and Canadian counterparts, believed in promoting equality. Now, all anyone cares about is equity. Housing equity. The UK, like the US, is entirely in the grip of the house-price inflationists. One of the most extreme examples is a recent BBC report, which reads like an investigation of satanic cults and their strange and twisted morality, but is actually about young workers who have not been able to afford to buy their own homes, and who, deep in their poverty-depraved hearts, wish secretly for… a decline in housing prices. Horreur! One “frustrated young professional” is quoted saying “I can’t wait for the crash. Bring it on… People talk about the crisis in the property market. But the real crisis is that so many people can’t afford a home of their own.” Terribly immature, the article suggests, as it goes on to quote a more mature voice, a 29-year-old teacher who “is old enough to remember the repossessions and negative equity that followed the crash in the early 1990s.” Even this otherwise reasonable person is being driven to vile wishes for a housing Armegeddon. “‘Morally, I feel bad about wanting it because I know people will end up on the street,’ she says. But unable to find anywhere affordable on her £30,000-a-year wage packet, she admits that doom-and-gloom headlines are giving her hope.”

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