This morning a lot of people are not happy campers:
I confess that last August I thought that Ms. Market had overreacted.
I thought that the political costs to being the people on whose watch the Euro had crashed were so great that the administrators of Europe would take steps to make sure that it did not happen on their watch. I thought that Germany would guarantee a facility which would then borrow at 2.5% and buy peripheral eurobonds yielding 5%. I thought the facility would then make a ton of money as the ECB reflated the continent, and changed its inflation target from 1% for the eurozone as a whole to 2% for Germany (which means 3% or more for the eurozone as a whole).
And I confess that last August I was focused on risks to the U.S. recovery from domestic sources.
It seemed to me very clear that the Fed and the Treasury would announce that they would take steps and would in fact take steps to neutralize and offset any effects of the eurocrisis on aggregate demand in the U.S. That seemed a much smaller danger than that right-wing political pressure interested in choking off recovery would push the Fed into a much-too-austere monetary posture.
I do not (yet) know how much eurorisk is on the balance sheets of U.S.-relevant banks and shadow banks. I do not know what the tail of the distribution looks like. I do not know if we wind up in the tail how much of their eurorisk banks and shadow banks will be able to dump onto new entrants to the market who see a long-term bullish bet on Europe as an attractive one. I do not know if we wind up in the tail how much of American business will not be financed over the next year as banks feel constrained by their eurorisk.
I do not know what facilities the Fed and the Treasury have planned and have started setting up to deal with getting eurorisk off of Ms. Market's diminished risk-bearing capacity if we wind up in the tail. And I really ought to know this by now. In fact, everybody should know this by now: the argument that the Treasury and the Fed should not reveal their contingency plans because it would spook the markets is at least two-months past its sell-by date.