Good and Bad Reasons to Worry About the Credit Crisis of 2008


Norris’s column today reads as though it was written by two

different people. Most if it is very good – a clear

explanation of where the next credit crisis might come from. But then,

at the end, it falls apart.


Krugman has already pointed out the most obvious error: total

subprime losses can’t exceed total subprime losses, no matter how much

dubious financial engineering was going on. Norris should have

trusted  his first instinct: anybody telling him something

which “appears absurd” is, probably, telling him something which is


Norris then continues in such a vein, first talking about

“C.D.S. defaults” (I think he’s talking about

counterparty risk here, but who knows), and then seemingly imagining

that he’s back in 1998:

Others worry that some emerging markets could run into big

problems because many borrowers there have taken out loans denominated

in foreign currency and could be devastated if local currencies lose


He means, of course, “lose value against the dollar”

– which means that Norris is now worried that the US dollar

is going to strengthen. But in any case, the

currency-mismatch problem is much less of an issue now than it was ten

years ago. Big sovereign borrowers are fast developing deep local

capital markets where they can borrow money domestically in their own

currency, and smaller ones are increasingly borrowing in their own

currency abroad. Those few emerging-market borrowers which do still

issue a lot of dollar-denominated debt are invariably in export

industries, and therefore their income is in dollars rather than local

currency in any case.

Norris’s big-picture conclusion, then, is quite right: the

credit crisis isn’t just about subprime, and there could be multiple

more shoes to drop in 2008. But some of his specific examples could

have been better chosen.

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