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
absurd.
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
value.
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.