10/28/2011

It's All Greek to Me

Before you get excited about the last minute Euro-Deal and the 340 point rally in the Dow, consider this: Wall Street has been dancing to Greece's whistle. If Greece says 'jump,' Wall Street jumps, if Greece says 'Sorry, false alarm,' Wall Street cries. This has been going on for about 2 years now, and it's getting pretty tired. Shame on you if you think everything's going to be fine just because Greece and/or its European pretend-to-be saviors announce another plan to come up with a plan.


Greece is broke and has no significant revenue sources to pay off its debt. Foreign investors own about $385 billion worth of Greek government debt. Many banks and governments that own Greek debt are at the brink of insolvency already, so Greece's inability to pay its debt may push other countries and their banks into insolvency. You can't trust statements from European officials because they are trying to prevent panic. Panic will make any kind of solutions more expensive and more difficult to execute.


Eventually Greece's saviors will realize that this is a leaky bucket money pit. A sudden and unprepared Greek bankruptcy would shatter the eurozone unless Greece is quarantined first.
Doing this wouldn't be cheap. To prepare for a such a quarantine (which is a more diplomatic term than ejection from the eurozone), Europe would have to prepare and fund a fund that can pay for:
1) Defaulting Greek government debt
2) Shoring up banks that won't qualify for inter-bank credit
2) Make sure Italy and the next dominos in line are safe
It's estimated the price tag will be about $3 trillion (about the same amount of money our Federal Reserve has printed in the last three years). Can Europe scrape together $3 trillion? The combination of liquidity drying up and assets imploding is a lethal one.

What's really happening in Europe is that everyone is bailing out everyone! The larger problem betrayed by yesterday's agreement is that European leaders continue to act as if they are mainly dealing with a crisis of confidence, which can be restored with evermore far-reaching bailout schemes. There are no new ideas for promoting the structural economic reforms—both at the periphery and at the center of the euro zone.   It's still a house of cards waiting for the next windstorm.

This is the classic example of how socialism can fail. Worker productivity is not sufficient to support all the benefits doled out. So governments borrow in ever increasing amounts to perpetuate the ruse. But eventually, the whole thing collapses of its own weight. We here in the US should be learning from this - but we haven't.