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Banks Amok? Perhaps Not

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The Greek Crisis has everyone nervous, and for good reasons. If this is what happens when a nation hits a financial crisis people around the world have to reasonably ask, “Are we next?” Every nation on this planet is deep into debt, although few are as bad off as Greece.

A lot of national debt is a threat to the world we live in for two related but distinct reasons. The first is that a nation loses the ability to make its own decisions and operate as a legitimate sovereign nation – which, in the case of democracies, means a de facto taking of power by creditors at the expense of the people. The second is that a large debt load has to be serviced by the government somehow which ultimately is a drain on the economy, reducing the standard of living and generally hurting personal opportunities.

With all this debt floating around causing so much pain it’s best to look at who holds it and how the world can get a handle on it.

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“Oxi” Means …

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Greece has voted “no”. The word is “oxi”, pronounced something like “ohee” in phonetic English, but with a little bit stuck in your throat on the “h” as if you are spitting on the European Central Bank (ECB).

It may well be that this deal had to be rejected and Greece has to essentially go over the cliff to be able to really stand on its feet one day. It may be that the ECB deserves to be spat on, and for that matter perhaps all banks have it coming to them.

But banks today are what we have to watch – in Greece and all around the world. The proud Hellenic people may be about to find out what a world without banks is like as theirs are at the very least going to remain closed for a while longer.  Life is going to become increasingly more difficult for everyone.

But this is hardly the first time Greece stood up and said “no” to the great powers of the world.
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Greece Stands Up

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Greece and Europe managed to find a way to kick the can down the road a bit, giving them four months to come up with a larger agreement. It’s exactly the kind of solution that we cynically expected here in many ways. But is there more to it than that?

The letter sent by Greek Finance Minister Varoufakis to the EU outlines exactly where Greece is coming from, and it tells us a lot more about the problem at hand. What he asked for was nothing more than the kind of consideration any other nation would want in this situation. That it was received so badly at first, then ultimately accepted in at least some form, speaks volumes about either the dysfunction of the EU or how bankrupt Greece is.

I believe it is the former, and the EU is nowhere near developing a stable process for dealing with issues like Greece or even calling themselves a real political or financial arrangement for the long haul.

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Fix the Debt

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With the big fight behind them, it’s time for the leaders in Washington to sit down and get to work in order to prevent another confrontation in January. Haha! I know, it’s always best to open with a joke, so I hope you liked that one.

Well, if you’re like most people this isn’t a joke at all. The Federal budget deficit is serious business and one of the most pressing problems facing this nation. There are a lot of myths being repeated, however, and many people will be surprised to learn that the deficit was reduced dramatically in 2013. With some growth happening it’s down to just 4% of the economy – from a high of nearly 10% in 2008. But it’s still critical to get a handle on things before the median Baby Boomers start retiring in 2017  if we’re going to realize a new era of growth.

Ready to get serious?

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Risk and Reset – Who Pays?

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Two news stories highlight the precarious nature of the restructuring that has laid the foundations for the next economy. They don’t seem to be related at all, but they highlight the twisted nature of “risk” and what it means when interest rates are low but investors are developing a renewed appetite for risk.

The first is the bankruptcy of Detroit, a long time coming, which was filed today.   The city has $18B in liabilities that they’d like to cut to $2B – hence a Chapter 9 liquidation filing, a declaration of surrender.  The city is beyond broken and needs to start again.  The second story is the rise of collateralized loan obligations (CLOs) and how our old friend Captain Morgain, er, JP Morgan is making a big bet on sketchy loans.

How are they related?  Both stories show risk laid bare, and both stories have a backstory of pushing the ol’ red button with RESET in big letters on it.

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