Investors don't like trouble. Instinctively like vast herds of wildebeest
running across the Serengeti plain investors will also often
stampede away from assets, markets, and countries that are having problems.
Although it often sounds both prudent and cautious to follow the herd, over time
it may be a bad idea.
Recently, investors have been savaging the so-called peripheral
countries of the eurozone. For one reason or another, countries sovereign debts
have been considered very risky, at least by the default swap markets. Certainly,
if you look at some of the numbers this appears to be true. However, it
might also be prudent to think of something else. As the American White
House Chief of Staff, Rahm Emanuel said, "you never let a serious crisis go
to waste". What he meant was that crises especially the ones forced on
countries or companies by the market create a climate where reform goes from should
to must. The greatest contribution that the market can make to efficiency
and ultimately economic growth is discipline. And market discipline is never
so effective as during periods of economic stress.
The reason why reform is always and everywhere difficult is because
it costs someone money. Rules, regulations, and laws in countries are
created because they satisfy a political imperative. The policies created can
ultimately help a majority of citizens, but more
often than not they help small groups of special interests. In either case, once
a law is in existence, it encourages business and investment to search for
paths profit from the law. If the law changes or is abolished, often the monetary
advantage that is gained goes with it. Those individuals, investors, or
corporations who benefit from the legal status quo will often fight tooth and nail to
ensure that things remain the same. To counteract such a massive lobbying
effort, often requires a true crisis.
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