How Greece’s Crisis Could Impact America

3rd March 2010

If today’s speculators bring down the Greek economy, they will likely blow up more debtor nations, and then in a cascading effect, turn on their main benefactors, the now heavily indebted British and United States governments.

Citizens are rightly angry at the way both the Bush and Obama administrations, aided by Governor Ben Bernanke — pretty well unconditionally bailed-out the bankers of Wall St., just like governments in Europe and Asia.

While politicians and regulators rushed to dampen the flames of financial crisis with taxpayer funds, what happened to those guilty of financial arson?

Besides the odd rogue and loner like Bernard Madoff, none has gone to jail for crimes against the people, as far as I know.

As if to rub our collective noses in it, bankers have paraded their contempt for both politicians and taxpayers by using bail-out resources to post massive capital gains and bonuses. It’s hard to believe they could be guilty of worse.

But believe it you must. For now these self-same bankers are turning on their rescuers — the governments that bailed them out.

Bankers, hedge and pension-fund managers, including Goldman Sachs, are attacking the very European governments that pay their fees; that provide banks with ‘free money’ in the form of negative rates of interest that guarantee their liabilities, and that in effect bailed them out  unconditionally with taxpayer largesse.

It is not a pretty sight.

When the worst of the financial blaze had been put out in 2009, regulators started to murmur about taking away Wall St.’s toxic toys. Violent tantrums were thrown; there may even have been some bullying.

Politicians and regulators capitulated.

The delinquents fooling around with incendiary financial devices were duly re-financed by the Federal Reserve and other central banks and left free to run amok in the global economy.

There they now threaten to put a match to Greece’s volatile economy.

So serious a threat do these speculators pose, that the Securities and Exchange Commission is examining abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products. The clear implication, according to SEC spokesperson John Nester, is that these products can potentially cause “cascading harm” to the financial system.

The fact is that if today’s speculators bring down the Greek economy, they will likely blow up more debtor nations, and then in a cascading effect, turn on their main benefactors, the now heavily indebted British and United States governments.

Greece’s fiscal crisis is no small thing.  Americans ignore it at their peril. Her heavily indebted economy  is the canary in a coalmine of sovereign debtors that includes Spain, Portugal, Italy, Ireland, Britain and the United States.

As long as the Greek canary keeps singing, people in Europe and the United States need not fear going up in smoke.

But Greece’s struggling government is threatened by a financial instrument widely used by speculators to discredit government bonds, and undermine the country’s weakening creditworthiness.

It is the same incendiary device that played a critical role in wrecking the US economy: the credit default swap (CDS).

As HuffPost readers well know, this is no swap. It is the most morally questionable form of insurance, because it lets one insure against the borrower defaulting on, say, a bond, without having an insurable interest in that bond. In other words, it is possible to insure against Greece defaulting on her bonds without owning Greek bonds.

That is like taking out insurance on your neighbor’s home without owning the house. The incentive to burn down the place and collect the payout, is powerful, which is why regulators ban you and me from the practice.

But not Goldman Sachs and other international financial speculators.

Instead these footloose bankers, hedge- and pension-fund managers operate beyond regulation and have a perverted incentive to burn down the house that is Greece.

As the financial crisis abated, world leaders (the G20) met in Pittsburgh in September, 2009 to review progress. They ended their Summit by patting themselves on the back for their handling of the crisis:

“Our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital.”

“It worked” they concluded, with just a touch of premature smugness.  In some ways it sure did.  There have been no brakes on global flows of capital.  Nobody’s toxic financial toys have been confiscated. For bankers, business is better than usual.  And so the stage is set for a new, global financial crisis.

World leaders could act, at even this late hour, to prevent such a crisis, and protect their citizens. They could place brakes on the mobility of capital, making it harder for speculators to roam wild and wreak havoc.

And as the blogger Sudden Debt argues, they could instruct central bank governors and regulators to govern CDSs like conventional insurance.

First: regulators could insist that those that sell Credit Default Swaps join the ranks of other insurance companies, where they will be regulated. They would be required, amongst other things, to comply with statutes, have adequate and segregated reserves and actuarial departments.

Second, regulators could ensure that those buying  Credit Default Swaps show proof of an insurable interest: i.e. that they own the underlying bonds.

With these two strokes of a pen, the meltdown of Greece could be avoided and a global crisis prevented.

But do our over-indulgent regulators have the confidence or maturity to take on their own delinquent banksters?

You tell me.

Published 02.28.2010 on Huffington Post