Gil’s Musings

Portfolio Insurance Peril

When my kids whine about how hard college is, I sometimes turn a deaf ear. I remember hanging out at the fraternity house, playing Dibble-Dabble in the pool, and Frisbee in the yard. I also had a part time job in the UC (University Center) game room, where I hustled pool and played video games for hours. Now, I still managed to Ace my exams in Economics, and more amazingly, EcoStat. So I still managed to make a 4.0 in my Economics minor, despite wasting tons of time playing games.

One of the better multi-tasking tools I turned to my advantage was playing pool andvideo games while I was on the clock (I was doing research). I was always good at pool (really good), but I also had a soft spot for Pac-Man and Asteroids, which were invented in the late 1970′s. Asteroids was a video-game that had a little space ship that could be flown around on the screen while shooting missiles at asteroids. The blown-up asteroids scored points and evaporated from the screen to make maneuvering easier. The asteroids flew faster the more points you scored, making it harder as you progressed. Three collisions were all you got for a quarter-dollar. There was a time-travel option if you got in a real bind. The “hyperspace” button could be used to transport you to a new location on the screen instantly, but your re-entry was risky. It could drop you right on top of an asteroid, leading to instant death. However, sometimes the moving asteroids would box you into a spot that you could not escape by shooting. Hyperspace was a risky choice, but often better than certain death. This must be how the Greeks feel. Unfortunately for them, The U.S. version of the game has the only Hyperspace button. Our button turns on the printing press. Theirs has been replaced with a call button to the EU. Now, constantly hitting the Hyperspace button comes with great unpredictable peril, as I am confident we will soon find out in America. But it does alleviate short term binds, and allows us to score more points in the meantime. This is the advantage of having the world’s reserve currency, and a centralized single-constituency monetary authority.

I am confident the Greek ship will collide with an asteroid soon, resulting in “game over”, and we are way past three collisions already. There are many reasons I say this. Greece cannot print its own money; Germany has the money, but not the will; Germany also cannot withstand the precedent. Italy, Spain, Portugal and others already have their hands out. “Why save Greece and not us?” It’s rather reminiscent of Oliver, the 1968 movie about street urchins and pickpockets, where Oliver asks the orphanage headmaster, “Please Sir, can I have some more grunge?” More Grunge??? There’s not enough grunge for everyone, and Germany will likely not expend their excess to save anyone unless they can save everyone. That seems unlikely.

Expect more unintended consequences. An obvious one has to do with portfolio insurance. Credit default swaps are portfolio insurance contracts insuring bondholders against default. It seems as though political wiggling is shooting for a Greek debt “write-down” that circumvents the rules of default while still providing a loss to debt holders. I imagine the bond-insurance contract holders will be none too happy to find their contract won’t cover this type of loss. It’s like allowing an insurance company to write the fine print after the contract has been issued. It’s a casualty of mixing socialism and capitalism. Expect portfolio insurance of all types to get very expensive.

At some point, I would like to cover the benefits of thrift as manifested in breadlines, where the school of hard knocks takes those who make bad decisions and/or take too many risks. But for now, school is out while bread is simply moved from one table to another instead. The would-be breadliners might now even have a little more time for even more relaxation, or get in a march or two, or maybe even a protest in a local park encampment. They might also discuss over a beer, when the union bus will pick them up for another staged march or photo opportunity. All of this while they discuss all of the ways they would like to carve up the golden goose. More on that next time.

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