So How much Skin do the Troika have in the Game.

My question to myself this morning was this €85 Billion sure is a big number but how much of that is real? The Greek Islands and other hard assets supposed to be administered by a Bank in Which Dr Shoebel is a director are real enough but essentially what the Greek Government gets in return are a multiplication of Credits based on that collateral . Who is granting those credits and what is behind them , this is the measure of what skin do the givers of the credits have in the game?what do they have to lose. and if lose it they should who gets what and what was pledged in the first place by the ultimate beneficiary.

I am of course talking about Financial Skin, either property or assets bought and paid for and held ´´free and clear with tax paid´´, as an old client of mine would often stress when stressing the reality of his High Net worth ( he did mean just in financial terms I don't think he meant it gave him a higher worth as a human being.).

I was delighted to find a very interesting Interview with Nassim Taleb on the Library of Ecnomics and Liberty Web site which addresses some of my question and has a wonderful transcript to quote from.

I will not quote from the transcript except for this one mind boggling quote from toward the end of the Interview.

 ´´Hence, people overpay for financial options. Hence let's sell[?] remote probabilities in finance. Well, anybody who has a brain would realize that banks aren't engaged in the business of selling small probabilities in finance. And they lost $5 trillion in 2008. More money than they ever made in the history of banking. So therefore, that statement, that people overpay for protection in finance, is false. Russ: When you said the number $5 trillion, for a minute I just thought you meant a lot of money, like a zillion. But it actually is close to $5 trillion, right? Guest: Yeah. That's what they lost before the government bailed them out. But $5 trillion is a lot of money. So what I'm saying is that instead of doing a lot of experiments, look at the variables themselves. Insurance companies haven't really made money till recently. All it takes sometimes is one event. And insurance companies are involved in very complex fat-tailed things, typically. Except for reinsurance. So look at the banks: bets on small probability events by financial firms have proven disastrous in history. And wealth came from bets on open-ended remote-probability events, namely entrepreneurship.´´

So the Banks had losses of FIVE TRILLION DOLLARS in 2008, more than all the profits they had ever made before in the history of Banking. Think about that. So where is the money coming from for the Greek Bailout and what is Austerity paying for exactly and who is paying it. It seems to me that The Skin in  the game is being flailed from the backs of people who had no benefit in or part of the hubris leading up to 2008 and are being asked to continue to fund the same hubris and business as usual  by Politicians and Bankers who literally have no Skin in the Game anymore since 2008 at least if they ever have had. The thing about Banking is that we always assume banks have a lot more at stake than they actually do, if it were so we would not constantly be being thrown into the turmoil that characterises Economic life for most of us.

´´´Capitalism has a built-in asymmetry, in the sense that bankruptcy has a zero in it, there's no negative for a company. But you still can have skin in the game by forcing people to lose a little more money. It doesn't have to be unlimited. So, you have unlimited profits and limited losses, but still maintain skin in the game. And I think we are reaching that equilibrium in economic life, outside of course of government intervention, banking and bailouts. You have that equilibrium. In other words, the builder isn't put to death. There are financial penalties. When you go to a doctor, if the doctor amputates someone and he takes the wrong leg, you don't take the doctor and amputate his leg in return. But there is a penalty, you see. So, we're not worried about places in which this equilibrium has been discovered heuristically, bottom up. I am worried about modernity. I am worried about bureaucrats causing hyperinflation, affecting savers and citizens but not harming them at all. I'm worried about that kind of stuff. We're not worried about contracts between individuals that can find equilibrium in some way or another.´´

Taleb on Skin in the Game | EconTalk | Library of Economics and Liberty  photo taleb.jpg


Check Out Popular Posts