Being a contrarian, I almost got in a big argument with some recent W&L alums (in finance) at a recent wedding. Then I realized I was at a wedding.
Anyway, the topic of discussion that I didn't discuss at the wedding reception was the latest Argentine default. Sort of an echo of the previous one we talked about in class. Several finance folks were furious about Argentina's legal machinations that amounted to a default on some of its debts (though it has resources to continue to pay other debts, which is what makes it odd). Good luck trying to find anything in the American press (Bloomberg, Forbes, etc.) that takes Argentina's side in this case. You won't find anyone crying for Argentina, as the saying goes. And you shouldn't and I won't. The point here is not to stick up for Argentina. It's rather that I also don't cry for the creditors who are getting stiffed.
The purchasers of Argentina's debt bought it why? Because it yielded more return (higher interest) than the measly amount you get on US investments nowadays. But why the higher return? Because it was riskier. Period. The financial community thought it had legal backing that would secure payment, and it is up in arms that Argentina proved to be an unreliable borrower, using devious legal mechanisms to avoid paying certain lenders. Why does Argentina do this? The point is that Argentina's sovereign financial management for a long time has been - and I apologize for the highly technical terminology: batsh*t crazy.
This craziness came as an infuriating surprise to some. But not to a lot of people who look at history. Buyers of Argentine debt thought they were getting Argentina-debt returns for something closer to U.S.-level risk. Argentina's response was populist and long-run-economically-stupid-but-politically-rational. It is a reminder that when taking risks in finance, sometimes you get what you're paid for.
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After reading Krugman's chapter, "Banking in the Shadows," I immediately recalled this post. Krugman blames the government for the vulnerability and losses in the system building up to the financial crisis, mainly for their failure to regulate "non-bank banks". However, investors in these institutions (I assume) knew that these institutions were highly unregulated and would have known the associated risks. While Krugman's main argument is that the government could have stopped these risky investments by extending regulation to non-bank banks, I think that the same concept applies for those involved with the risks: "sometimes you get what you pay for"
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