Yet another sovereign debt crisis

In the latest Financial Services Outlook and in a recent piece in the Wall Street Journal, American Enterprise Institute (AEI) resident fellow Alex Pollock examines past sovereign debt crises, especially the European crisis of the 1920s, to put the current situation in perspective.

Pollock explains that a cycle of self-interest incentivizes the sale of these bonds:

"[Governments] have an obvious self-interest in promoting loans to themselves and to other governments they wish to help or influence. They may even create a reassuring name for these loans: "risk-free assets." Banks are extremely vulnerable to pressure and direction from governments--the more regulated they are, the more vulnerable. Bureaucratic government employees will never discourage loans to their political masters."

Pollock's key points:

  • Having believed the myth that governments don't default, many banks and investors will take huge losses in Europe's sovereign debt crisis.
  • The historical regularity of government defaults--more than 250 have occurred since 1800--gives the lie to the notion that holding sovereign debt is "risk-free."
  • The sovereign debt crisis of post–World War I Europe provides highly relevant lessons for today.


Alex Pollock was president and chief executive officer of the Federal Home Loan Bank of Chicago from 1991 to 2004, part of a thirty-five year career in banking prior to joining AEI. He can be reached at
apollock@aei.org or through steffanie.hawkins@aei.org or 202.419.5212.

For help reaching any AEI scholars and for all other media requests, please contact Jesse Blumenthal at jesse.blumenthal@aei.org or 202.862.4870.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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