The Good Ol Summit Time

As summer marches on, the financial situation in Europe remains unresolved, some economists are arguing that a devaluation and subsequent inflation of the Euro is in order (see Kenneth Griffin and Anil Kashy here and Martin Feldstein here). The Grumpy Economist, University of Chicago’s  John Cochrane, is skeptical and provides a helpful analogy:

Imagine that  your brother in law had been drinking too much for 40 years, perpetually on and off the sauce, never really able to give it up. He went  through a painful 12 step program and rehab, and finally quits the sauce for 10 years. He threw away all the liquor in the house. Then he loses his job. Is “one more big night out to soothe the pain, and then I’ll really really never do it again”  at all a credible plan?  That’s exactly what my normally sensible colleagues (see above) are advocating.

My guess is that most of our readership does not have brother-in-laws who have been drinking too much for 40 years, so I will give you something closer to home.

Summit EUphoria

Back when I was in college I had a friend who tended to fall behind a bit in his classes, something like accumulating large piles of debt.  At some point, of course, the debt would mount and he would reach a crisis situation, forcing him to face some unpleasant facts.  He would then of course have to develop a plan to “restructure” the debt — for instance, does this sound familiar?, getting an extension on a paper, strategically dropping a class, deciding which course he could get by without studying, etc…  And, remarkably, once the plan was in place, he would have some sort of celebration even prior to completing any of the work he had to do.

To my knowledge, he had no way of credibly committing to putting the plan in place. What I mean by that, of course, is that he generally didn’t put the plan in place.

I’m not sure whether he ever graduated, but I do know that he has been a very successful entrepreneur.  I’m not sure exactly what that does for our analogy.

On a not entirely unrelated note, Kevin “Angus” Grier at the Kids Prefer Cheese blog provides some visual insight in the salubrious effects of European summits on financial markets.

It’s summit time!