May 19, 2024

Economix: Podcast: Good Euros, Bad Euros and Market Worries

Gresham’s Law is a centuries-old economic principle that is often defined quite simply as “bad money drives out good money.”

Because gold is more valuable on the open market than copper, for example, copper coins with the same nominal value as gold coins would quickly drive the gold coins out of circulation; the gold coins would be hoarded or melted down, to extract every last bit of value from them.

There’s more to Gresham’s Law than that, though, and Tyler Cowen says it helps to explain some of the problems in the euro zone.

In the Economic View column in Sunday Business and in a conversation in the new Weekend Business podcast, Professor Cowen, who is based at George Mason University, says that many bank depositors in Ireland have begun to doubt that country’s commitment to the euro.

As a result, depositors have begun moving money from Ireland to banks elsewhere within the euro zone. In effect, euros held in a bank in, say, Germany, are being perceived as being more valuable than euros held in Ireland.

Gresham’s law is relevant in this case because it holds that if two assets — in this case, euros held inside and outside Ireland — are deemed by traders to have different values, sooner or later the legally fixed price parity will break down. This breakdown is already occurring, Professor Cowen says, and it is causing enormous problems within the euro zone. The various patches being applied won’t be enough to cure this problem, in his opinion.

The financial problems in Europe are part of the “wall of worry” that investors have been climbing in the long rally under way in many stock markets around the world since March 2009. Calamities abound, as I write in the Strategies column in Sunday Business, but markets have been rising anyway.

As I explain in the podcast, the markets have been weighed down by a host of troubling issues. These include the weak economic recovery in the United States, turmoil in the Middle East and North Africa, the rising price of oil, and the prospect of budget cuts in the United States and an end to the Federal Reserve’s expansionary monetary policy. On the other hand, corporate profits are rising, and even if the economy is less than robust, it is certainly growing. Whether you emphasize the pros or the cons will go a long way toward determining your market outlook.

Compared to the dark days of the financial crisis in 2008, the markets have become calm and stable. But after a series of investigations into what went wrong, no high-level participants in the disaster have been prosecuted, as Gretchen Morgenson and Louise Story wrote this week in The Times.

In a discussion of the financial crisis on the podcast, they say that the current situation differs markedly from other periods in history. In the aftermath of the savings and loan crisis of the late 1980s, for example, more than 800 bank officials went to jail. But financial regulators have referred very few cases stemming from recent events to the various prosecutors.

The podcast covers a lot of ground this week. It also includes a discussion between David Gillen and Adam Bryant of the lessons that C.E.O.’s have given over the last several years in Mr. Bryant’s Corner Office column in Sunday Business. Mr. Bryant’s book about these lessons is excerpted in the section this Sunday.

And Randall Stross discusses apps that show where sobriety checkpoints are located, a subject that he covers in the Digital Domain column in Sunday Business. In his view, this may be one of those rare occasions when too much information is being made available for the public’s own good.

The podcast also updates the week’s business news, including President Obama’s proposal for paring down the budget deficit.

You can find specific segments of the show at these junctures: prosecutors and the financial crisis (28:59); news headlines and the “wall of worry” (21:02); lessons from the Corner Office (16:50); 4. Tyler Cowen on the euro (11:05); Randall Stross on controversial apps (6:45); the Week Ahead (2:04).

As articles discussed in the podcast are published during the weekend, links will be added to this posting.

You can download the show by subscribing from the New York Times podcast page or directly from iTunes.

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