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The lexicon of financial disaster, part II

How about a little QE to go along with that PIIG?

James Bowers, dressed as Uncle Sam, asks people if they can "spare a trillion", as they walk past him in the rain outside the front of Federal Hall, near the New York Stock Exchange, Oct. 28, 2009. (Chip East/Reuters)

NEW YORK — Every era has its jargon, a kind of verbal currency that bestows “street cred” on the savvy practitioner and tells everyone within earshot that the speaker is, indeed, in tune with the zeitgeist.

Just over a year ago, we checked in on the avalanche of financial acronyms flooding the language thanks to the collapse of the supposedly all-knowing, all-seeing unregulated market capitalism. By now, “TARP” and “Too-Big-Too-Fail (TBTF) are on the tip of every school kids tongue. And we all seem to understand what Barack Obama and Viagra have in common: (stimulus).

Yet as the crisis has rolled on like a snowball down the poorly policed, garbage-strewn hill of global finance, it has absorbed a whole new generation of jargon into the mainstream of our battered language. SIVs (“Structured Investment Vehicles) are passe, giving way to CDO²; TARP (the “Troubled Asset Relief Program”) wound up requiring “quantitative easing — QE,” and all that stimulus has begotten a “sovereign debt” crisis, complete with PIGS and super-PIGS and even, if we’re all really unlucky, a hyper-PIG, too.

I hear you saying, “What in God’s name is he talking about?” In the interest of clarity (if not sanity or prudence), here’s an updated cheat sheet of the jargon d’jour:

Reality sucks

Let’s start with QE — quantitative easing. In theory, QE describes the entry of the Federal Reserve (or other country’s central bank) into “open market operations,” in essence, meaning the central bank has thrown the economic policymaking book out the window. QE features the Fed doing something successive Fed chairman vowed never to do: buying financial assets (like preferred stock in technically bankrupt banks) in order to pump money (or “liquidity”) into the economy during a liquidity crisis. (Remember when, in late 2008, major corporations suddenly couldn’t borrow money to keep operating? That’s a liquidity crisis.)

The simplest definition of QE is “printing money.” The Fed can do that, of course. But the Fed, being the world’s most important bank, doesn’t have to be that simplistic. For Ben Bernanke and his cohorts, QE is just a matter of moving some digits around to increase the amount of credit the Fed allows itself to draw on in its own huge account. (It’s as if you could just call your bank, tell them you’ve exhausted your line of credit, and raise the limit whenever you like — all while controlling the interest rate).

QE in the U.S. began in 2008 and has been practiced on a massive scale ever since. Having lowered interest rates to about zero and finding banks still wouldn’t lend, the Fed had little choice. The danger, of course, is that too much “liquidity” could eventually create inflation.

Outside the U.S., printing money isn’t so unusual. Japan has repeatedly intervened to save its “zombie” banks from the reality that many of them are bankrupt. And last month, the European Central Bank — notoriously loathe to do anything that might cause inflation (due largely to Germany’s long memory of its Weimar period) — faced its own brush with death due to the crisis over Greece and agreed to engage in QE by buying Greek government bonds on the open market. (The ECB denies that constitutes QE — again proving that reality often finds itself at odds with financial policymaking.)

PIIGS go to market

Speaking of Greece, another term now bandied about regularly is an acronym named for the four (or five — there’s a debate) most-likely-to-default-on-their-debts European countries: Portugal, Ireland, Greece and Spain — the “PIGS” (or PIIGS, if you include the deeply indebted Italians).