TIPPING POINTS

"The moment of critical mass, the threshold, the boiling point"

The tipping point is the critical point in an evolving situation that leads to a new and irreversible development. The term is said to have originated in the field of epidemiology when an infectious disease reaches a point beyond any local ability to control it from spreading more widely. A tipping point is often considered to be a turning point. The term is now used in many fields. Journalists apply it to social phenomena, demographic data, and almost any change that is likely to lead to additional consequences. Marketers see it as a threshold that, once reached, will result in additional sales. In some usage, a tipping point is simply an addition or increment that in itself might not seem extraordinary but that unexpectedly is just the amount of additional change that will lead to a big effect. In the butterfly effect of chaos theory , for example, the small flap of the butterfly's wings that in time leads to unexpected and unpredictable results could be considered a tipping point. However, more often, the effects of reaching a tipping point are more immediately evident. A tipping point may simply occur because a critical mass has been reached.

The Tipping Point: How Little Things Can Make a Big Difference is a book by Malcolm Gladwell, first published by Little Brown in 2000. Gladwell defines a tipping point as "the moment of critical mass, the threshold, the boiling point." The book seeks to explain and describe the "mysterious" sociological changes that mark everyday life. As Gladwell states, "Ideas and products and messages and behaviors spread like viruses do."

The three rules of epidemics

Gladwell describes the "three rules of epidemics" (or the three "agents of change") in the tipping points of epidemics.

• "The Law of the Few", or, as Gladwell states, "The success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts."According to Gladwell, economists call this the "80/20 Principle, which is the idea that in any situation roughly 80 percent of the 'work' will be done by 20 percent of the participants." (see Pareto Principle) These people are described in the following ways:

• Connectors are the people who "link us up with the world ... people with a special gift for bringing the world together." They are "a handful of people with a truly extraordinary knack [... for] making friends and acquaintances". He characterizes these individuals as having social networks of over one hundred people. To illustrate, Gladwell cites the following examples: the midnight ride of Paul Revere, Milgram's experiments in the small world problem, the "Six Degrees of Kevin Bacon" trivia game, Dallas businessman Roger Horchow, and Chicagoan Lois Weisberg, a person who understands the concept of the weak tie. Gladwell attributes the social success of Connectors to "their ability to span many different worlds [... as] a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy."

• Mavens are "information specialists", or "people we rely upon to connect us with new information." They accumulate knowledge, especially about the marketplace, and know how to share it with others. Gladwell cites Mark Alpert as a prototypical Maven who is "almost pathologically helpful", further adding, "he can't help himself". In this vein, Alpert himself concedes, "A Maven is someone who wants to solve other people's problems, generally by solving his own". According to Gladwell, Mavens start "word-of-mouth epidemics" due to their knowledge, social skills, and ability to communicate. As Gladwell states, "Mavens are really information brokers, sharing and trading what they know".

• Salesmen are "persuaders", charismatic people with powerful negotiation skills. They tend to have an indefinable trait that goes beyond what they say, which makes others want to agree with them. Gladwell's examples include California businessman Tom Gau and news anchor Peter Jennings, and he cites several studies about the persuasive implications of non-verbal cues, including a headphone nod study (conducted by Gary Wells of the University of Alberta and Richard Petty of the University of Missouri) and William Condon's cultural microrhythms study.

• The Stickiness Factor, the specific content of a message that renders its impact memorable. Popular children's television programs such as Sesame Street and Blue's Clues pioneered the properties of the stickiness factor, thus enhancing the effective retention of the educational content in tandem with its entertainment value.

• The Power of Context: Human behavior is sensitive to and strongly influenced by its environment. As Gladwell says, "Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur." For example, "zero tolerance" efforts to combat minor crimes such as fare-beating and vandalism on the New York subway led to a decline in more violent crimes city-wide. Gladwell describes the bystander effect, and explains how Dunbar's number plays into the tipping point, using Rebecca Wells' novel Divine Secrets of the Ya-Ya Sisterhood, evangelist John Wesley, and the high-tech firm W. L. Gore and Associates. Gladwell also discusses what he dubs the rule of 150, which states that the optimal number of individuals in a society that someone can have real social relationships with is 150.

RESEARCH METHODOLOGY

PROCESS OF ABSTRACTION

SOVEREIGN DEBT & CREDIT CRISIS

MUNI BOND OUTFLOWS

RISK REVERSAL

RESIDENTIAL REAL ESTATE - PHASE II

COMMERCIAL REAL ESTATE

2011 will see the largest magnitude of US bank commercial real estate mortgage maturities on record.

2012 should be a top tick record setter for bank CRE maturities looking both backward and forward over the half decade ahead at least.

Will this be an issue for an industry that has been supporting reported earnings growth in part by reduced loan loss reserves over the recent past? In 2010, approximately $250 billion in commercial real estate mortgage maturities occurred. In the next three years we have four times that much paper coming due.

Will CRE woes, (published or unpublished) further restrain private sector credit creation ahead via the commercial banking conduit?

Wiil the regulators force the large banks to show any increase in loan impairment. Again, given the incredible political clout of the financial sector, I doubt it.

We have experienced one of the most robust corporate profit recoveries on record over the last half century. We know reported financial sector earnings are questionable at best, but the regulators will do absolutely nothing to change that.

So once again we find ourselves in a period of Fed sponsored asset appreciation. The thought, of course, being that if stock prices levitate so will consumer confidence. Which, according to Mr. Bernanke will lead to increased spending and a virtuous circle of economic growth. Oh really? The final chart below tells us consumer confidence is not driven by higher stock prices, but by job growth.

9 - CHRONIC UNEMPLOYMENT

There are 3 major inflationary drivers underway.

1- Negative Real Interest Rates Worldwide - with policy makers' reluctant to let their currencies appreciate to market levels. If no-one can devalue against competing currencies then they must devalue against something else. That something is goods, services and assets.

2- Structural Shift by China- to a) Hike Real Wages, b) Slowly appreciate the Currency and c) Increase Interest Rates.

3- Ongoing Corporate Restructuring and Consolidation - placing pricing power increasingly back in the hands of companies as opposed to the consumer.

FOOD PRICE PRESSURES

RICE: Abdolreza Abbassian, at the FAO in Rome, says the price of rice, one of the two most critical staples for global food security, remains below the peaks of 2007-08, providing breathing space for 3bn people in poor countries. Rice prices hit $1,050 a tonne in May 2008, but now trade at about $550 a tonne.

WHEAT: The cost of wheat, the other staple critical for global food security, is rising, but has not yet surpassed the highs of 2007-08. US wheat prices peaked at about $450 a tonne in early 2008. They are now trading just under $300 a tonne.

The surge in the FAO food index is principally on the back of rising costs for corn, sugar, vegetable oil and meat, which are less important than rice and wheat for food-insecure countries such as Ethiopia, Bangladesh and Haiti. At the same time, local prices in poor countries have been subdued by good harvests in Africa and Asia.

- In India, January food prices reflected a year-on-year increase of 18%t.

- Buyers must now pay 80%t more in global markets for wheat, a key commodity in the world's food supply, than they did last summer. The poor are especially hard-hit. "We will be dealing with the issue of food inflation for quite a while," analysts with Frankfurt investment firm Lupus Alpha predict.

- Within a year, the price of sugar on the world market has gone up by 25%.

US STOCK MARKET VALUATIONS

WORLD ECONOMIC FORUM

Potential credit demand to meet forecast economic growth to 2020

The study forecast the global stock of loans outstanding from 2010 to 2020, assuming a consensus projection of global
economic growth at 6.3% (nominal) per annum. Three scenarios of credit growth for 2009-2020 were modelled:

• Global leverage decrease. Global credit stock would grow at 5.5% per annum, reaching US$ 196 trillion in 2020. To
meet consensus economic growth under this scenario, equity would need to grow almost twice as fast as GDP.
• Global leverage increase. Global credit stock would grow at 6.6% per annum, reaching US$ 220 trillion in 2020.
Likely deleveraging in currently overheated segments militates against this scenario.
• Flat global leverage. Global credit stock would grow at 6.3% per annum to 2020, tracking GDP growth and reaching
US$ 213 trillion in 2020 – almost double the total in 2009. This scenario, which assumes that modest
deleveraging in developed markets will be offset by credit growth in developing markets, provides the primary credit
growth forecast used in this report.

Will credit growth be sufficient to meet demand?

Rapid growth of both capital markets and bank lending will be required to meet the increased demand for credit – and it is
not assured that either has the required capacity. There are four main challenges.

Low levels of financial development in countries with rapid credit demand growth. Future coldspots may result from the
fact that the highest expected credit demand growth is among countries with relatively low levels of financial access. In
many of these countries, a high proportion of the population is unbanked, and capital markets are relatively undeveloped.

Challenges in meeting new demand for bank lending. By 2020, some US$ 28 trillion of new bank lending will be
required in Asia, excluding Japan (a 265% increase from 2009 lending volumes) – nearly US$ 19 trillion of it in China
alone. The 27 EU countries will require US$ 13 trillion in new bank lending over this period, and the US close to US$
10 trillion. Increased bank lending will grow banks’ balance sheets, and regulators are likely to impose additional capital
requirements on both new and existing assets, creating an additional global capital requirement of around US$ 9 trillion
(Exhibit vi). While large parts of this additional requirement can be satisfied by retained earnings, a significant capital gap in
the system will remain, particularly in Europe.

The need to revitalize securitization markets. Without a revitalization of securitization markets in key markets, it is doubtful
that forecast credit growth is realizable. There is potential for securitization to recover: market participants surveyed by
McKinsey in 2009 expected the securitization market to return to around 50% of its pre-crisis volume within three years.
But to rebuild investor confidence, there will need to be increased price transparency, better data on collateral pools, and
better quality ratings.

The importance of cross-border financing. Asian savers will continue to fund Western consumers and governments:
China and Japan will have large net funding surpluses in 2020 (of US$ 8.5 trillion and US$ 5.7 trillion respectively), while
the US and other Western countries will have significant funding gaps. The implication is that financial systems must
remain global for economies to obtain the required refinancing; “financial protectionism” would lock up liquidity and stifle
growth.

US$ RESERVE CURRENCY

SocGen crafts strategy for China hard-landing

Société Générale fears China has lost control over its red-hot economy and risks lurching from boom to bust over the next year, with major ramifications for the rest of the world.

Société Générale said China's overheating may reach 'peak frenzy' in mid-2011

- The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes. In a report entitled The Dragon which played with Fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years.

- It has waited too long to drain excess stimulus. "Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

- The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said. Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

- The bank said overheating may reach "peak frenzy" in mid-2011. Markets will then start to anticipate a hard-landing, which would see non-perfoming loans rise to 20pc (as in early 1990s) and a fall in bank shares of 50pc to 75pc over the following 12 months. "We think growth could slow to 5pc by early 2012, which would be a drama for China. It would be the first hard-landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it," said Mr Bokobza, head of global asset allocation. However, it may bring down bond yields and lead to better growth in Europe and the US, a mirror image of the recent outperformance by the BRICs (Brazil, Russia, India and China).

- Diana Choyleva from Lombard Street Research said the drop in headline inflation from 5.1pc to 4.6pc in December is meaningless because the regime has resorted to price controls on energy, water, food and other essentials. The regulators pick off those goods rising fastest. The index itself is rejigged, without disclosure. She said inflation is running at 7.6pc on a six-month annualised basis, and the sheer force of money creation will push it higher. "Until China engineers a more substantial tightening, core inflation is set to accelerate.

- The longer growth stays above trend, the worse the necessary downswing. China's violent cycle could be highly destabilising for the world." Charles Dumas, Lombard's global strategist, said the Chinese and emerging market boom may end the same way as the bubble in the 1990s. "The basic strategy of the go-go funds is wrong: they risk losing half their money like last time."

- Société Générale said runaway inflation in China will push gold higher yet, but "take profits before year end".

- The picture is more nuanced for food and industrial commodities. China accounts for 35pc of global use of base metals, 21pc of grains, and 10pc of crude oil. Prices will keep climbing under a soft-landing, a 70pc probability. A hard-landing will set off a "substantial reversal". Copper is "particularly exposed", and might slump from $9,600 a tonne to its average production cost near $4,000. Chinese real estate and energy equities will prosper under a soft-landing,

- The bank likes regional exposure through the Tokyo bourse, which is undervalued but poised to recover as Japan comes out of its deflation trap. If you fear a hard landing, avoid the whole gamut of Chinese equities. It will be clear enough by June which of these two outcomes is baked in the pie.

SocGen crafts strategy for China hard-landing Pritchard

PUBLIC SENTIMENT & CONFIDENCE

SHRINKING REVENUE GROWTH RATES

PIMCO'S NEW NORMAL: According to PIMCO, the coiners of the term, the new normal is also explained as an environment wherein “the snapshot for ‘consensus expectations’ has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).” That is to say, the distribution of forecasts has become more uniform (as per Exhibit 1).

Federal Reserve Chairman Ben Bernanke gave his predictions on a House Republican plan to cut $60 billion dollars from the FY 2011 budget, saying it would eliminate 200, 000 jobs and only slightly lower economic growth.

He instead endorsed a Congressional federal deficit reduction plan that would take effect over a five to 10 year period, saying that markets look more towards Congressional action than the actual state of the economy. His remarks came during a House Financial Services Committee hearing in which he delivered his agency's semi-annual monetary report.

Despite Bernanke’s observations, several Republican lawmakers expressed doubt based on past efforts by the Fed and Congress to prompt economic growth through large stimulus packages.

Yesterday, the Fed Chair told the Senate Banking Committee that the U.S. economy will continue to grow this year despite rising oil prices, a high employment rate and weak housing market.

The 1978 Humphrey-Hawkins Act requires the Federal Reserve Board of Governors to deliver a report to Congress twice a year on its past economic policy decisions and discuss recent financial and economic developments.

SOURCE: The Greek debt crisis: The ECB’s three big mistakes VOX

REFERENCE: Tipping Points  Audio - Global Insights 

SOURCE: Greek Aid Level Hinges on Asset Sales WSJ

• Greece's bid for more financial aid for next year and 2013 could hinge on accelerated sales of state assets, according to people familiar with the matter.
• Greek government officials are to resume talks with the European Union and the International Monetary Fund in Brussels later Monday to discuss what might become another aid package for the country.
• The meeting comes amid concerns that Greece's austerity and reform program has stalled and that Athens will need more help to fill a funding gap over the next two years.
• But Greece will be expected to play its part. "Any new money would require a faster pace of reforms and privatization," said Platon Monokroussos, head of financial markets research for EFG Eurobank Ergasias SA, one of the banks advising the government on asset sales.
• Athens is expected to identify a funding gap of up to €60 billion ($85.43 billion) over the next two years.
• EU officials so far have declined to comment on Greece's funding situation or to commit to any future aid until after a June audit of Greek budgets.
• But more ministers Monday were raising the possibility of more aid under certain conditions. "Greece first itself has to perform much more actions: more reforms, more austerity packages, the privatization program should be definitely rolled out by Greece," Dutch Finance Minister Jan Kees de Jager.
• Eurobank's Mr. Monokroussos, who is familiar with Greece's budget woes, said the range could be €50 billion to €60 billion, depending on whether the government hits its growth and budget targets.
• In May last year, Greece narrowly avoided default with the help of an €110 billion bailout from the EU and IMF in exchange for a multi-year program to fix its public finances and reform its over-regulated economy.
• Those plans will be in stark relief at this week's meeting of European finance ministers, although the weekend arrest of IMF chief Dominique Strauss-Kahn—who had been instrumental in arranging Greece's bailout a year ago—has cast a shadow on the proceedings.
• An IMF official familiar with the Greek talks said Mr. Strauss-Kahn's arrest prevented his key meeting on Sunday with German Chancellor Angela Merkel, whose backing would be needed for any new program to be considered.
• A spokesman for EU Commissioner for Economic and Monetary Affairs Olli Rehn said Monday that Mr. Strauss-Kahn's absence will have no impact on any needed decisions.
• A lawyer for the IMF chief, who is facing charges of sexual assault in New York, said his client would plead not guilty.
• Mr. Rehn's spokesman also said the EU, the IMF and the European Central Bank are making "important efforts" to ease the conditions of the Greek loan—including changes to maturities and interest rates.
• German Finance Minister Wolfgang Schäuble said this weekend that Greece might receive an extension to the repayment of the EU-IMF loans already received, but only if private creditors also agree to wait longer for repayment of their Greek debt holdings.
• Germany also is stipulating tougher austerity steps in Athens. Greek officials are getting the message that any new deal would mean the slow pace of selling government property and other assets would need to pick up.
• The government is unhappy with suggestions that the privatization process be put under external management. "We are resisting this along with proposals that some assets should be 100% privatized," the official said.
• While the government has targeted €50 billion in sales of state assets by 2015—mainly by exploiting state property holdings—the process has been impeded by labor protests, a raft of legal issues and opposition inside Prime Minister George Papandreou's own government.
• The government says that by the end of this year, it hopes to raise between €2 billion and €4 billion from its first privatizations.
• These would include the listing of a first portfolio of real-estate holdings.
• The government also plans to reduce its 20% stake in former telephone monopoly Hellenic Telecommunications SA this year, and sell a 17% stake in incumbent power company Public Power Corp. SA next year.
• Other privatizations or stake sales involve gambling monopoly OPAP SA, natural gas monopoly DEPA SA and companies ranging from state-owned casinos to local waterworks companies.
• But there have been divisions within the Greek cabinet, including a public spat between Finance Minister George Papaconstantinou and Energy Minister Tina Birbili over whether the state would continue to control 51% of Public Power Corp., which has a virtual monopoly on electric power generation and distribution.
• Where the finance minister wants to privatize the big utility, Ms. Birbili wants to retain state control as an asset of national importance, and to keep power bills down.
• Also resisting the move is PPC's powerful labor union, Genop, which has warned it will stage rolling 48-hour strikes if the government proceeds with further privatizing the monopoly.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: The Euro Is Dead Foreign Policy

• Europe is living in denial. Even after the economic crisis exposed the eurozone's troubled future, its leaders are struggling to sustain the status quo.
• At this point, several European countries will likely be forced to abandon the euro within the next year or two.
• European leaders tell us that this is impossible. There is no legal mechanism, they say, for exiting the euro. But the collapse of the euro is simple arithmetic: Once a country's debt-to-GDP ratio gets high enough, it becomes impossible for it to generate enough future taxes to repay its existing debt and interest costs.
• This week, Portugal became the latest country to threaten the integrity of the eurozone when it saw the yield on its Treasury bills soar, based on investors' fears that it would be unable to pay its debt.
• The only way out of this conundrum is for countries with insurmountable debt burdens to default on their euro-denominated debts and exit the eurozone so that they can finance their continuing fiscal deficits by printing their own currency.
• Here's a hint for Europe's politicians: If the math says one thing and the law says something different, it will be the law that ends up changing.
• The countries currently teetering on the precipice include "peripheral" countries -- such as Greece, Ireland, and Portugal -- as well as large countries, such as Spain, Italy, and France.
• It is extremely unlikely that all of these countries will still be members of the eurozone by the time revelers gather to ring in New Year's 2013.
• The most likely scenario is that the next two years will witness the departure of more than one peripheral country and at least one of the large countries.

GREECE

• Greece is at the top of that list.
• The country will soon have a sovereign debt-to GDP ratio of more than 150 percent and an economy that contracted approximately 4 percent in the past year.
• It has long suffered from:
  • the worst corruption
  • largest shadow economy in Europe,
  • some of the lowest labor participation rates,
  • most generous pension systems,
  • highest consumption rates among its European peers.
• It is true that the Greeks have made heroic efforts in the past six months to cut spending and raise taxes, but it won't be enough to reverse the explosive costs of covering its debts. And yet, the story goes, Greece will somehow repay what it owes.

IRELAND

• Following closely on Greece's heels is Ireland.
• During the so-called "Irish miracle," the country experienced a housing boom that saw twice the appreciation as did the United States. When this bubble popped, Ireland's banking system suffered a massive loss.
• The government's bank bailouts have added more than 20 percent of GDP to its budget deficit in the past year and will add a similar additional amount to its deficits in the near future.
• The Irish case also shows the perils of EU intervention. Ireland was forced by its self-serving European partners to guarantee massive bank debts -- in order to forestall debilitating losses to German, Belgian, Danish, and British banks, among others -- as a condition for receiving emergency EU assistance.
• This Irish policy mistake has raised its debt to stratospheric levels, which the government will be hard-pressed to bring down.
• Thus, in effect, some of the largest EU countries proved their willingness to throw Ireland under the bus to postpone dealing with their own financial institutions' problems.

SPAIN

• Now Spain is being pushed by those same European partners into making the same deadly mistake as Ireland.
• Spain's housing boom was similar to that of Ireland and was similarly financed by large external borrowings.
• The good news in Spain, however, is that most of the country's largest financial institutions appear to be solvent.
• If Spain shuts down its insolvent savings banks and allows closed banks to default on their external bond debts held by other EU countries' banks, Spanish sovereign solvency can be preserved.

ITALY

• A number of other European countries face similarly daunting fiscal challenges. Italy, for example, is running a debt-to-GDP ratio in excess of 125 percent.
• Although serious and immediate fiscal spending cuts could give Italy a reasonable chance of repaying its debts, the country seems so politically broken that it is unlikely to make the deep spending cuts that would permit it to stay in the euro.
• Its meager cuts this past year are an indication of how difficult it is for Italy's political system to confront its challenges.

FRANCE

• The same failure of political will bedevils France, Belgium, and Portugal.
• The French proved that they are willing to riot over a two-year extension of the retirement age.
• They will need to reconcile themselves to far more drastic measures if they hope to get their dismal fiscal situation under control.

• This partial collapse of the euro is inevitable, and Europe's leaders should focus on the next step:
• Their challenge now is to lay the groundwork for a sustainable currency union in the future, once exiting countries reform themselves enough to rejoin.
• To do so, however, they will need to take stock of the institutional deficiencies undermining the current union, so that the new eurozone is more crash-proof than the last one.
• Europe must do far more to cut the growth of government spending -- the only credible path to preventing ballooning deficits.
• But it needs to go even a step beyond that: Europe must agree on measures that prevent countries from behaving irresponsibly to take advantage of their membership in the eurozone.
• One of the reasons that Italy and Greece spent so much is that their interest rates on debt fell dramatically when they joined the eurozone, making deficit finance more attractive.
• There is no substitute for the creation of a fiscal union, which would centralize enforcement power that could credibly control spending.
• A currency union cannot survive without a corresponding fiscal union. But fiscal reform is not enough without measures to strengthen the competitiveness of southern Europe.
• Southern European countries, notably Spain, Italy, Portugal, and Greece, are finding it increasingly difficult to compete in global trade --
  • the result of restrictive union contracts and
  • labor laws
• They have accordingly suffered from high current account deficits and high unemployment.
• If left unchecked, these dynamics will produce a political powder keg of widening interregional economic-welfare differences that would threaten the long-term cohesion of the union.

• The only way around this problem is to make southern Europe more business-friendly.
  • That means making it easier for businesses to fire workers and cut wages.
  • It also means less generous welfare programs and
  • credible efforts to reduce corruption and
  • lower entry barriers to foreign competition.

• A reconstructed eurozone should make the implementation of these reforms part of the requirement for membership.
• The European financial sector is also in dire need of reform. New regulations should be put in place that make banking collapse less likely, most importantly through the creation of credible means of measuring bank risks and requiring capital and liquidity commensurate with those risks.
• Europe should also put in place policies that transparently and predictably allocate authority across different national regulators in the event of a bank's collapse.
• Without a credible plan for resolving a large global bank crisis, politicians will tend to prefer bailouts as a means of avoiding unpredictable financial chaos.
• Policymakers must learn that the "too-big-to-fail" problem is both dangerous and avoidable, and that choosing not to bail out banks is a viable option.
• Politicians today are frightened of transparency in the recognition of bank losses and are often unwilling to close insolvent banks out of a fear of "systemic risk."
• However, it is only by credibly recognizing banking-system losses that governments can put an end to uncertainties in the financial market.
• The eurozone's problems are not going away. Whether these problems will eventually be seen as bumps on the road to a credible currency union or as symptoms of the irreconcilable conflicts within Europe depends on how the eurozone countries react.
• The good news is that Europe possesses the techniques of statecraft and financial engineering to build the institutional foundations of a long-lived, stable union.
• The lingering question, however, is whether it possesses the political will to do so.

REFERENCE: Tipping Points