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November 1, 2011

All Debt Crisis Debates Are As Simple As This

November 1, 2011

All Debt Crisis Debates Are As Simple As This

All debt crisis debates are as simple as this: Debt that can’t be paid won’t be paid, so it’s only a matter of who will take the losses and when.

That’s Former Federal Home Loan Bank of Chicago president Alex Pollock’s Law Of Finance, which he outlines in this month’s Mortgage Banking Magazine. Not some term paper. Short and sweet. There’s lots of chatter out there, but this is one of those pieces that hits home.

It’s a must-read but the endgame is just as stark as the Law itself: “economic reality is never lasting stability, but constant adjustment and transition.” Here’s the piece:

Trying But Failing To Escape Pollock’s Law
The dominant problem with being in the wake of the bubble is that we cannot escape Pollock’s Law Of Finance, which states: Loans that cannot be paid will not be paid. Because they will not be paid, the loans will default and impose losses.

In the wake of a bubble, the losses are unavoidably massive. This applies both to the American housing and commercial real estate bubble, and to the European sovereign debt bubble.

Because this iron law and its implications are highly unpleasant, financial actors and politicians strive mightily to escape them in spite of the fact that they cannot, with scheme after scheme. All to no avail, of course. The massive losses must ultimately be taken.

So the questions are not: Will the loans default? They will. Or: Will the losses be huge? They will be. The only real questions are: What form will the defaults take? Who will take the losses? And when will the losses be recognized by those who are going to take them? These real questions provide plenty of room for lawyers, accountants and politicians to operate.

Guided by these insights, we can make more sense of financial crises and their accompanying rhetoric. [ continue reading… ] ___
Author: Alex Pollock