Wednesday, April 28, 2010

Goldman, Greece, Lincoln, and China

The list of villains in the financial crisis of 2007-09 is long and well-known. It includes ninja (no income, no job, no assets) home buyers, unscrupulous mortgage brokers, lax government regulators, easy-money Federal Reserve Board, greedy investment bankers, irresponsible politicians, deficient economic and finance theories, and so on.

Imagine that a building is on fire. Forget, for the moment, who set or what caused the fire. The proper course of action is to put out the fire before it spreads to other buildings. What Goldman Sachs did was to pour gasoline, not water, on the blaze. That everyone else did it is no excuse. That no law explicitly forbade it is no excuse. Say what you want about grandstanding Torquemadas and Madame Defarges on the dais, what GS did and its putative explanations during Senator Levin’s Star Chamber proceeding was embarrassing.

The chickens, along with the hawks, vultures, wild turkeys, and eagles, have come home to roost on Greece and the viability of the euro experiment. Greek financial statistics have been a house of marked cards. Strikes and demonstrations reveal a population oblivious to its own misbehavior, unwilling to take the necessary belt-tightening medicine. The collapse of the Greek bond market threatens Portugal and Spain. The integrity of the eurozone and viability of the European Union are in grave danger. “You want the truth? Europeans can’t handle the truth.” The fat years are about to be replaced by lean years, regardless of any financial package extended to Greece.

Abraham Lincoln got it right. “You can fool some of the people some all the time, and all of the people some of the time, but you cannot fool all of the people all of time.” Replace “people” with “investors.”

The Greek crisis, which has driven down the value of the euro against the dollar, puts China’s plans to diversify its foreign currency reserves temporarily on hold. China’s long term solution lies in making the yuan (Chinese dollar) a trading and reserve currency. Until that day arrives, China will be known by a new acronym FBC: China can make everything faster, better, and cheaper. By 2020, perhaps sooner, I anticipate hearing a Chinese Mark Haines begin the morning financial show with the words “Live from the financial capital of the world in Shanghai.”

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