And we are no longer asking “why” to the crisis

It’s amazing how we tend to forget. Not so long ago some people were still being blamed, bankers mostly, the beheaded god Alan Greenspan, some professional confidence man (aka con) Bernie Madoff, and a few more, but except for the latter that has even seen the disgrace in its own family, the former have gone back to their oversized bonuses and Mr. Greenspan is enjoying a deserved retirement, maybe with less conferences than what he had hoped for.

We’ll end up believing that the crisis is more a natural catastrophe, like those earthquakes in Japan, than a punishment. Isn’t it always easier not to blame yourself? God, with infinite power and without any need for an explanation, has just decided to punish you. And that’s all. Why think? Why blame? Why even change?

A system that privatises gains and socialises losses can’t be good. And that’s what we are seeing all over the world. All citizens end up sharing the burden. The “too big to fail” has been finally accepted by the whole humanity, the final enshrinement of the “moral hazard”.

Maybe we have finally reached our destination. We are capitalists when it’s time to reap benefits, but socialists with losses. Be aware, that only applies to big corporations. Finally, the richer 5% has some way to outgrow us all, to keep concentrating more and more power in their hands and make sure that when they fail they won’t have to answer for it.

I read today in the news that this year General Electric, in spite of a huge profit figure (true, it could have been better but it’s still huge) is only paying 7.4% of their profit in taxes. Congratulations to their accounting department, finding every possible trick, every crack in the fiscal legislation, every opportunity not to pay… But, at the end of the day, do you feel like they are making the same effort as citizens are? How much do you personally pay?

And another example, this time from Spain, from the likely next president in another year, a sentence in a conference in Germany: “If Spain is having a bad time it’s not the Spaniard’s fault”. Whose fault is it then? The hidden external enemy? God’s?

Beware, things that do not work can’t last for long…

From Germany to Spain by train (the Eyjafjallajökull volcano and a “laisser-passer”)

Yes, I was one of those people stranded around Europe thanks to a cloud of ashes that no one could see but make brighter reds at sunset. My journey was a 42-hour journey through Europe’s interconnected railway connections, but also an eye-opener on the frailty of globalisation and a living proof that the railway systems of the European countries are not effectively interconnected.

Belgium is a good example. Ongoing works on a track to Liege. No way to get there on time, but with a 15-minute delay. A train loaded with people that are connecting to the Thalis, a high-speed train taking people directly to Paris and Brussels. Two trains leaving at almost the same time we arrive. They hold one for a few minutes and, to the travellers’ consternation, let the other one go. A whole journey ruined because of a three-minute coordination error. Lots of wasted space on the leaving train, lots of upset passengers that need relocation on the station. Belgian management at its worst. Fortunately a compassionate soul understands the disaster they have caused and change my first class tickets to Spain for some piece of paper: a “laisser-passer” (let him pass, a safe-conduct). With it I can sneak into any train, no seat assured, but if there is a seat, I can take it. That was the key to my escape.

A journey away, in Brussels, the Belgian capital, lots of people queuing at the counters. People sitting and standing everywhere. No trains to leave. We manage to sneak into one. Half of the places were free!

Then in Paris. Train workers on strike for the 14th day. No way to get info in Paris Nord. In Paris Lyon we are stopped by some first-attention workers selected, I guess, by their ability to mutter some words in English. Totally unhelpful, there are no spaces in trains for the next three days. Everyone should go home. The poor bastard even doubts that my reservations are authentic and asks me for proof. Amazing.

Next stop at Paris Austerlitz. Instead of flocks of British citizens trying to get their chance as in the last station, this time it’s crowds of Spaniards there trying to get home. No places till Saturday. I manage to talk to a nice guy from the company which tells me something that I’ve already heard a couple of times before: “hold on to that laisser-passer, that’s the best thing anyone can have out there” and then shares some secret with me “there’s going to be some special train service taking people southwards to Toulouse tonight at 21:56 at Paris-Bercy station”.

That was another key moment. The secret train. One of those trains that France has put up in order to help travellers through France.

Paris Bercy. That station does not even appear on the maps. (Just check it, amazing! It’s not Bercy metro station which is in the centre of Bercy, a huge borough) I had to go back to my source and ask for some references. Not even the taxi driver knew where Paris Bercy was. Fortunately and thanks to my confident I knew it was just after crossing the Bercy bridge over the Seine. Once there, there were some sign.

The station is used to transport cars by train. It’s an auto-train station. They have added some passenger wagons to a huge line of car-transporting wagons.

Ten people controlling the entrance, god forbid that some crowd would jump onto the train to get home. I’m sure they would only select the travellers really deserving it, the desperate ones, the children. After all that’s what was in the news: France doing all they can to help expatriates get back home.

Fortunately, my “laisser-passer” worked. They seemed to be impressed by it. I know it’s going to end up hung up somewhere at home. We could board the train… and then we left for Tolouse. I was to share my journey with a lot of refugees, sing songs and share experiences, or so I thought.

Well, you can see the reality. Fortunately there were two people to talk to. The rest of the train was empty. I guess they had a tough time deciding which of those refugees deserved going back home. So they decided not to let anyone go. These are the trains, the special trains, meant to be helping people get back home. And that’s how they go: empty.

There were still a lot of things to come. The 14th day of railway workers strike in France cancelled the following trains I hoped to take and I had to make it in a bus to the Spanish border. There I read again about the special resources countries were providing to help those stranded get back home. Astonishing.

Yes, resources were there, somehow. But totally uncoordinated and wasted. Here lies the proof of the case against European efficiency and how politicians and media speak of things they don’t know about. In the meantime, the non-transported travellers mean loses both for them and the companies they work for, for the airlines and for the whole Europe. Another notch down the economic crisis that is dragging us down.

At the end of the day, the Eyjafjallajökull leaves us with lessons on how the globalisation is frail, too frail. Myself, I should be in India now. Instead I’m at home in Barcelona, and happy to be here by the way. Is the air transportation sector so frail to completely collapse under some ashes? Is the railway transportation system so inept that it just wastes more and more resources while failing to respond in an emergency situation? Why are the politicians lying to us so blatantly about the extra efforts they’ve made to help people get back home? How can railway workers just keep on strike in this situation and Mr. Sarkozy simply do nothing about it?

We are less prepared than we think we are. And we must get ready and push towards open skies and build the next generation of air navigation systems the sooner the better. Also it is necessary to overhaul the whole inefficient European rail transport system.

Experiences. We all learn from them. I also try to. And from one reconforting image, the most positive thing the volcano did (as if telling about our shortcomings wasn’t good enough…) the impressive sunset over the Seine in Paris, the one thing that has improved and turned even more reddish with the Eyjafjallajökull’s ashes.

A weekend in Cologne (Köln) and some bits of European construction

I’ve been this weekend in Cologne, an amazingly thriving city on the Rhine born about 50BC as a Roman outpost. A city that grew in the industrial revolution thanks to the enterprisingness of its inhabitants that strategically used their proximity to the coal of the Ruhr region.

Catholics, in 1248 they began the construction of their cathedral. It would stop in 1560 for as long as four centuries, with a crane that would be Cologne’s symbol and witnessed lots of generations live and die. Until 1848 you could have seen something like this…

This was the tallest building of the wold as well, until the Washington Monument‘s capstone was set in 1884.

Let’s make another step in time to 1945 after the second World War. Cologne was obliterated with bombings. Less than 10% of its buildings survived. One of them was the Cathedral. Although hit by several bombs, maybe miraculously, the Dom still stood in the middle of a lake of rubble.

Little remains of those years. Where Adolf Hitler rallied his troops, now there’s a lake where students gather instead to have fun and drink beer. Now Cologne is a cosmopolite city, a mix of cultures and lifestyles, somewhat disordered for a German city, but very much alive and breathing. It is the broadcast centre in Germany, the fourth biggest city and see to many international art festivals. Their inhabitants celebrate the good weather sitting in the terraces at night and have one of the largest Karnevals, or Mardi Gras, in Germany. Last Saturday’s view was quite different:

Yes, I went there to study, to prepare the forthcoming exam on Strategic Direction and Corporate Finance and Governance with my German peers on the MBA. We had a great time and also worked a lot.

Now for European construction. We saw the next election’s publicity in many streets. I saw it again in Barcelona, when I came back yesterday. I read the newspapers and saw, to my amazement, how Spanish politicians are using the European elections to talk about local issues, even to try to condone some misbehavings some of their numbers have committed.

Our politicians, and I do thing that’s an European wide issue, are inadvertently but irresponsibly turning us away from democracy with their constant cynicism, hypocrisy and abuse. And our democracies, our peace, our union and our prosperity are the most valued shared good that we have. They are the only guarantee that neither Cologne nor Barcelona’s inhabitants, both cities whose civilian population have been bombed by air, each from a different political side, as if it mattered now or then to any crying child whose life had been severed, are not going to endure that cruelty anymore.

We are the ones benefiting and inadvertently collaborating to the European Union by travelling, by getting to know each other, by learning to respect our difference, by meeting to study an MBA from a British business school in a German roaring town.

I’m going to miss Cologne… it is a city I could live in!

Green shoots, maybe, but don’t expect flowers

I’m increasingly growing wary, or even tiresome, of anyone that talks about green shoots. Yes, put a lot of fertiliser over a bed of rocks and something will grow on that. Mostly weeds. After all, weeds are green, but they don’t make nice flowers.

After pouring so many fertiliser taken from the forced lenders throughout the world (yes, we and our descendants are the forced lenders, and the fertilisers are the billions of dollars irresponsibly poured everywhere) what else is there to expect than a few green shoots?

But one thing is to have green shoots, and another one is to have a sound recovery. That needs to be sustained on healthy fundamentals, which we don’t have now.

Okay, maybe we are not falling that fast… so what? Even the most bullish markets have relevant corrections, why shouldn’t the bearish? That is some hope in midst of despair, true, but the despair still has a sound reason to be.

Hiding things in the balance sheet, having assets that don’t reflect real prices, is not the way to recovery either. First we need that atonement, that reconciliation with reality, that would be a real stress test, after a previous sanity check: let’s value things for what they’re really worth.

And in the meantime the GDP of the Euro countries has contracted more than 10%. Germany is contracting more than Spain, with an unemployment growth rate 1000% bigger. We, who were the main sinners, are weathering the storm better? Something tells me that the methodology that we are using to calculate our GDP, given the fact that we have to remove seasonal effects being a touristic country, is delaying the changes to the real data. But something also tells me that the most inflexible labour markets are exhibiting those same troubles that don’t let them flexibly grow, only applied to contraction. There’s plenty for all of us.

Hmm, I’m so sorry to be negative but… let’s prepare and get ready, because those shoots are bound to whither and the worst is yet to come.

Crowding out time (more wood from the forced lenders)

Yes, right now the governments are pouring a lot of money into the system. Is it working? Can it work? Ain’t we trying to extinguish this fire the same way it started?

A well known effect in macroeconomics is the multiplicator accelerator model: there is a multiplicative effect when new investments are introduced in the economy and the economy grows in a higher rate. The other way can happen too, as the resources leave the economy and the slump is also accelerated. We are suffering this effect now, catalysed with instruments such as banks that are monetary multiplicators per se.

If we wanted to stop and reverse this effect, introducing new resources into the system, how can we do that?

The first temptation is, of course, to substitute this private money lenders for some other lenders that have no choice: the forced lenders. Yes, you guessed well. We are the tax payers. We are the forced lenders. Where private investors need trust to decide to participate, we simply have no choice.

Yes, you get the idea, our money, government’s money, gets poured down regardless the amount of trust present in the system. And the investors trust governments because they are backed by us: forced lenders.

But what happens when we pour all this money into the system? There’s another less known effect in macroeconomics, the crowding out effect. Government’s spending will substitute private initiative and occupy an even higher proportion of the economy. If the flow of money goes the way of the state, it won’t go the way of the private investors.

But then, being the state the lender and the backer of many securities, amidst this global scare, why should anyone not forced to invest in riskier assets? Investors will end up financing the treasury instead, and leaving the financial markets.

Where will the money come from to finance public companies? What will happen to suffering capital markets further short-circuited from the money flow? They might as well keeping go down the slope for a long time.

Yes, I am aware that to explain this crowding up effect, the IS/LM introduced by Sir John Hicks and Alvin Hansen needs higher interest rates that affect the unwillingness to invest to the private sector through an increased cost of capital. In the present situation, with lower costs of capital, the crowding out effect lacks the mechanism to happen.

But what if the present scare of capital turns into a similar mechanism to the increased cost of capital? What of the negative animal spirits? Can they make us disinvest from profitable companies and make them inviable? Couldn’t that make a crowding out effect too?

Meanwhile, but let me express my reservations about this stocking-more-wood process. More wood in the hands of the government, lower interest rates: more wood everywhere. Seems dangerous to my little me. Maybe our firemen should think of other options.

Hallowed are the American taxpayers…

Hallowed are the American taxpayers
as they are the ones that will pay this huge bill,

Hallowed is the American Treasury
as it will acquire junk assets in the name of the Americans,

Hallowed are the international creditors
cos they will get increased risk premiums from a riskier debt,

Hallowed are the Feds
pushing forward a plan they don’t know if will suffice,

Hallowed is the growing debt
it will at least double in the forthcoming years,

Hallowed is the forgotten Laffer Curve
now supposed to work better if turned downwards,

Hallowed is the non-interventionist state
that implements socialist ideas in times of distress,

Hallowed are the big investment banks
allowed to merge to hide their shortcomings and ignominies,

Hallowed are the plunging assets
as they will be allowed to survive with their old values in the balance sheets,

Hallowed are the short sellers
sinners never repented from what they did in 1929,
no longer allowed to arbitrate or cover risks,

Hallowed are the politics
for they will still adore the  taxes,

Hallowed are we all
for we will long feel the ripple effect of short-sighted politicians and unelected officials.

Sorry for the mental rambling, forgive me my rantings, but it’s been a hell of a week… time to change the subject though…

Freddie Mac and Fannie Mae (Houston we’ve got a problem)

Even the most important (and supposedly liberal) economy in the world has its contradictions. And in this continuous deleveraging process that it’s suffering two huge pieces have fallen. Well, in fact, they have not fallen but been saved by the bell, at the last minute, by the American taxpayers. Or maybe not?

Let’s go step by step. This kind of operations are called nationalisations all over the world (and bringing them under government’s control in the US). Now the shareholders and the debtors of Freddie Mac and Fannie Mae have a problem. But the deleveraging process had to stopped somehow, somewhere. And that line was worth defending.

Avoiding the discussion about moral hazard, six months ago I was writing about the Financial weapons of mass destruction unleashed in the US (the party is over) and also about The new cycle of capital recovery (who’s financing your debt now?) Let’s use the same ideas now to seek coherence in the present situation.

Let’s summarise the whole reasoning and see where it leads to:

1. Freddie Mac & Fannie Mae’s shareholders (and many other shareholders and creditors too) have lost a lot of money, true. We still haven’t seen that in the news, but a lot of sovereign funds must have lost fortunes. The time will come when they’ll have to account for them.
2. Taxpayers will have to pay a lot of money now, true.
3. The consequences could be worse if the taxpayers didn’t intervene, so it’s worth doing it, true. This line should not be crossed.
4. So we do it, we nationalise Freddie Mac and Fannie Mae. Done. And to avoid moral hazard their shareholders must have an important loss, otherwise the system would be asymmetric. Or did any companies volunteer to share their big gains not so long ago?
5. Shareholders and debt holders of those companies must be unhappy and worried about the soundness of the American economic system, reasonable. Wouldn’t you after losing that much? They’ll think twice before investing again in the US. Sensible thought, and yet that’s where our problems begin.
6. Taxpayers are paying. I said that in number 2. But, can they afford the bill? The US is a country with a huge fiscal and commercial deficit, so it depends on foreign inflows of capital. Just follow the previous links to my half-year-old articles to see more.
7. The taxpayers only have two ways to pay the bill: increasing taxes or further going into debt. I don’t see any of the presidential candidates advocating for higher taxes so I assume it will be the second option. The treasury will have to emit further debt, and not in small quantities. I’m approximating here but, these huge numbers are in order of the current debt volume. In other words, the US debt might be doubling because of these nationalisations.
8. Doubling the debt volume means a lot about a country’s ability to repay it: it roughly halves the quality of the debt. We know that the US debt is a high quality debt, but that quality will subsequently be slashed down.
9. The world has a few very important lenders, mainly Asian countries. Need I say which one? But they are not that enthusiastic with investing in the US any more. The foreign inflows into the US economy have been steadily declining in the last months.

Now for the conclusion, do we really expect the international lenders to go and help the same country that has given them important losses? Could we have an “holistic” response to keep the international lenders happy without incurring in moral hazard? Will they, after the negative experience, keep buying increasing quantities of worse quality debt?

The equation is something like this:

• ↓↓↓ availability of capital in the markets
• ↑↑↑ losses lenders and investors have suffered
• ↓↓↓ their predisposition to invest again
• ↑↑↑ increase in US debt needed
• ↓↓↓ decrease in the US debt quality

Well, there’s no easy exit to this cycle. The US will be pressured to compensate the international lenders of their loses if they want to keep capital inflows going. But isn’t that strikingly close to the definition of moral hazard? Notwithstanding, which are the other options to keep the flow going?

The deleveraging process is not quite over yet. And the US treasury is constrained between a series of conditions that cannot be all met at the same time. But worse of all, the whole country’s economy virtuous circle is broken and has turned into a vicious one. The economy is not sustainable any more. Houston we’ve got a problem.

On a positive note, there are more sides to this story. Two ideas:

• The US are the main market for those that are financing them. That means that, at least, they are financing a nation that is giving them back part of their finance and holding the activity of their industry. While this cycle exists, things won’t be so grim.
• Other economic areas don’t have this vicious circle, but are falling into stagflation instead. Even with its shortcomings, the US is still a growing economy. There are not that many around. The solvency of the US economy is still holding. And they have the resuscitated dollar.

And another Damocles sword:

• Is this the end of the intervention over Freddie Mac and Fannie Mae? Will these funds be enough? That depends on the still falling value of their assets and their growing insolvencies when people won’t be able to repay their mortgages. Who knows how much money will still have to be injected… and where else.

Why is the cost of food skyrocketing? (think twice before assuming we’re more hungry)

I’ve been having a conversation about food prices. It’s a fact that they have skyrocketed lately, and they don’t look like they’re going to go down soon. Why is that?

The first reason is, of course, that now we are more people eating. I personally haven’t changed my eating habits, but a lot of Chinese, fortunately, have. The huge Asian country witnessed the birth and nurturing of million of “little Buddhas” that serve as a sign that a lot of Chinese don’t suffer the fate of their not-only-culturally impoverished parents. And the more people eating, the more scarce food becomes, and that drives prices up, the simple law of demand.

Prices soaring? Not guilty!

Another way of explaining why the prices raise is because of utility. Utility describes what the consumers feel about the products: the more utility, the more people are willing to pay for it. Food is not only useful but really necessary. That necessity is expressed in the price. Utility, thus, is part of the price of the product. If this was the beginning of the XXth century, Eugen von Böhm-Bawerk would say it’s not utility but marginal utility, and he’d be right. The utility depends on the eyes of the beholder. And the utility of food becomes less important as you are fed, and then focus to things like not-so-useful diamonds.

Thus the price is ultimately related to scarcity and utility. Food becoming more scarce means that we’re going to pay more for it. And don’t expect that to change.

But is it so great the difference between food consumptions? A few years ago we had all these surpluses at both sides of the Atlantic Ocean, not knowing what to do with so much cereals and milk, heavy-subsidised goods, and now we are running out of them? That surely would mean great savings for the EU and US governments and tax-payers!

So, where have all the surpluses gone? Have the “little Buddhas” eaten so much? I don’t think so.

A system is, by definition, an ordered set of elements that includes relationships between them. In a price system then, there are not only products, but also a series of relationships that link them. Those relationships are key to understanding the whole system. Some of them establish products as complementary or substitutionary. The former will need each other thus demand of fuel will raise the more vehicles exist, the latter will substitute each other thus the use for private cars will shrink in congested cities that develop efficient mass-transportation systems. In that case the perceived utility for public transportation will be greater for some people, boosting demand.

Surprisingly substitutive: guilty!

When biofuel was invented everyone hailed the newborn as a chance for sustainable energy production. Now we had something useful and expensive to convert our cereal overstocks into.  Very high subsidies were required to start building alternative sources of energy like this one, but there was a case for it: less dependency from “dangerous countries” and a lot of big corporations interested in the processes (and subsidies). A great alternative to fossil fuels was being born, and also a less polluting one.

But what we didn’t anticipate was that move would tie prices of food and energy together. Thanks to the newly created market distortion (sorry, I mean subsidy) now there are new induced scarcities throughout the food chain: for example less and more expensive grain for livestock for example. Nobody anticipated either, until the Nobel laureate Paul Crutzen did, that more farming requires more nitrogen, and that nitrogen is highly polluting, especially when it gets released to the atmosphere as nitrous oxide (N2O) by means of biofuel.

There are many implications of the use of biofuels, some positive, some are not. But it’s not easy to take a look to the global picture.  In between of so many interested views and sponsored applied science it will take some time and a lot of effort to get perspective on the issue. But one thing is clear: don’t blame it on the “little Buddhas”.

Maximising shareholder value (a mantra that is half a lie)

The main goal of a company is to maximise shareholder value. If you write something like this just a few will disagree. But the fact is that this commonly accepted truth (“commonly accepted” should be disqualifying enough for something to be called truth) contains a great deal of ideology and political positioning. Should we question it then?

Chartered companies were created in Europe as regulated companies, with obligations and rights, that thrived in the 16th century. They were thought to facilitate new enterprises such as international trade and exploration in a time that the world was much bigger than it is today and, seen from the European world-view, unexplored. Usually they were awarded with monopolies resulting from the discovering of new lands. The challenge was to discover, open the new routes and make them profitable. Shareholders provided capital and benefited from profits. There were even “good government” dispositions (yes, that was prior to Enron).

They evolved. They originated the modern limited-liability companies. That was already the 19th century. They required (and still require) an official registration of a constitution document signed by its creators and first shareholders. Before they were only partnerships, some people operating together. But then they could be taxed and could own assets. They bear the consequences of their actions, not their owners. That way any loss would be limited.Those corporations would protect their shareholders, limiting their losses to the capital that had been invested. And they had rights to part of the benefits: dividends.

Corporations thus existed per se, and were accountable to different kinds of stakeholders: not only their shareholders but also their customers, their employees (and that included their managers), their suppliers, the communities where they operate, and the whole of society. The company had to think of all of them.

But in some moment, probably in the same wave of thought that I described in the previous post The darker side of economics (how well intended theories can get the worst out of MBAs) things simply changed.

Shareholder value became anything. Superinflated-ego-CEOs came into view as the media cherished and the public agreed. We became used to greed, to super-heros that, by themselves, transformed companies into successes (yes, like if CEOs did everything all alone, and the shareholders owned everything). They began earning more and more, from stock options to huge sums of money, while employees were either laid-off or with raises along with inflation levels.Somewhere along the road we assumed that the CEOs were the companies and the shareholders owned the assets. Neither is true. The CEOs just have a small share of the work, but in every company there’s much more human capital than the CEO. And it’s the company that owns the assets, shareholders just contribute with another kind of capital in return for a share of the benefits, similarly to what banks do in return for interests. But shareholders can buy and sell at any time in the capital markets. Usually shareholders have no implication at all with the company, being funds that replicate an index or people that invest their savings and have no knowledge of the business at all (neither wish to have).

Shareholders provide funds, assume risks and, of course, expect value. But they are not the only ones to assume risks and expect value: so do employees, that cannot swap jobs as easy as selling stock on the market. And so do banks, and so do countries that, in the first place, enabled their charters and their limited responsibilities.

If they were all theirs, why should the rest of us grant them limited-liabilities? If owners could do whatever they wish with the assets, they should be registered to their names, and assume the whole range of consequences. A world were a few could do anything and still be protected wouldn’t be fair. Risk must be rewarded, for sure, but not just the shareholders’ that surely deserve their retributions: customers that buy must be taken care of because customers that feel that they are only cash cows or cheated won’t be loyal, as employees that feel that loyalty has stopped being reciprocal.

Companies are more than profit machines. There are dilemmas to be solved, stakeholders to be considered and prioritise, there’s more than cost/benefit analysis. They are more than isolated units. And they don’t have to be greedy, as we don’t have to be. There’s still room for principles, for integrity, for loyalty. And that’s for employees, for shareholders, for managers and for CEOs.

Private equity and the subprime crisis (bad news that could be good after all)

The subprime crisis has arrived. Yes, many anticipated so. That’s what happens when economy depends on expectations. They take some time to change and, when they change, they do it abruptly. Like those subprime mortgages that have transformed from “hot products” to “hot potatoes”.

Overall is not a matter of solvency but liquidity. I agree, tell that to those that will not be able to afford the mortgages, maybe up to 500.000 people in the US. But investors do not worry much about them. Investors just get scared and they stop pouring endless capital… until they start to do the same somewhere else.

Because companies still report record earnings and the price of gold has been rising non-stop. That means that the machine is still working.

But let’s not be too complacent. A wider crisis can still arise. If gold is “hot”, ABS are cooler than ever. ABS are asset-backed securities, financial products made up of mortgages and things alike that are covered by a real asset, such as your home. These are a way for banks to get cheap financing and externalise risks, because the default risk is transmitted by the ABS, while it wouldn’t be with debt, for instance.

If banks get increasingly difficult to finance, they will transmit this additional cost to companies and consumers. And that’s an entry point to generate a widespread crisis. Central banks should add additional liquidity to the system by lowering rates, but that seems unlikely given their current policies.

But, what about private equity? Now it will be more difficult for them to get cheap capital to finance, that’s for sure. But that doesn’t mean they have no future. On the contrary, they are now more needed than ever, because they are the ones to provide that leaning, that additional shakedown that companies needed in times of more expensive credit.

Remember, there’s much more to private equity than leveraged buy-outs, they have an important role in the markets, and that means they have an important role to play in this new situation.

PD: I read this morning in “The Economist” that the US were thinking of “relief measures” for the crisis. Then I changed to a Spanish newspaper and read about the Popular Party (centre-right and opposition and presumed liberal) to propose the right not to pay mortgages during a year for the unemployed. Alarmed by both news I couldn’t help the thought: regulation must ensure that the system is not abused but, let the market regulate itself. Although some regulations will be painful, it’s the most effective way we’ve come to know.