2012Jul23 Think this is hot?
"One of the greatest disservices you can do a man is to lend him money that he can't pay back." -Jesse Jones
International Economies:
Germany's Spiegel reports today that Greece is seeking more time to meet the conditions for the €130 billion bailout package that the country agreed to in March. The report claims that such a request would require an additional €10-€50 billion in aid to Greece, an amount that Germany will not provide and that the IMF is unlikely to offer.
The report also cites Germany's economy minister Philipp Rösler:
"If Greece no longer meets its requirements there can be no further payments," he said in an interview with German public broadcaster ARD. "For me, a Greek exit has long since lost its horrors."
Greece is reportedly seeking an additional two years to meet the terms of the March bailout, citing delays caused by the recent election as the reason.
The European Commission, the European Central Bank, and the IMF (aka, the Troika) are currently reviewing Greece's progress toward the reforms it agreed to in March and the outcome of that review will determine whether or not Greece receives the next €31.5 billion installment in October. Without it the country is certain to run out of cash quickly.
Whether or not the Eurozone can kick Greece out is debatable. What is not debatable is that if Greece collapses, investors in Spanish, Italian, and other peripheral nations' will be lined up for their money the next day. The Eurozone cannot afford to let that happen - and neither can the US.
Domestic Economies:
The yield on the U.S. ten-year treasury dipped below 1.40% this morning, the lowest in recorded history. Why does money continue to flow into this perceived "safe haven?" Is America really financially stronger than the rest of the world or are we bankrupt? To illustrate, allow me to introduce, "The Satirical World of Bob."
Bob was an articulate, charismatic guy with a decent paying job. He did, however, possess a penchant for the good life and was motivated enough to do whatever it took to achieve it. When his first credit card application arrived in the mail - along with the normal circulars and other advertisements - he quickly grabbed a pen, filled it out and sent it in. Within two weeks, Bob had received his first plastic money machine. Machine I say, because in Bob's mind, a credit card was like creating money out of thin air. Shortly thereafter, he had acquired 3 additional cards. After an extended shopping spree, Bob was the proud owner of a new state-of-the-art boat complete with all the requisite fishing gear, a few HD-TV's, computers, various kitchen appliances, and whatever else he desired. Without much effort at all, his cards were soon maxed out. What did Bob do? Why, he got more credit cards, that's what. In fact, in a few months, Bob had 24 credit cards, each at their limit, putting him exactly $1,200,000 in the red. With an annual income of only $75,000, his debt-to-income ratio was a staggering.....well let's just say he was having trouble paying the minimum payment. What did Bob do? More credit cards? No! Bob figured he needed more income so he went job hunting.
Bob had always been an avid news buff and enjoyed a good political debate from time to time. In fact, this congenial chap always fancied himself as the consummate soft-hearted, social minded sort. To him, the government seemed like a perfect fit for his spending proclivities. After all, he felt the massive federal debt was as necessary as mother's milk is to a newborn babe. He also fancied the way the government could print new money without anything to back it up anytime it so desired. To him, deficits were just a normal part of life.
Before we return to our story, let's exit our "Satirical World of Bob" and focus on a most pressing matter. FACT: The U.S. government is bankrupt! Yes, bankrupt. Skeptical? Ok, I'll provide some facts and you decide.
The government has an "official" debt of $15.8 trillion and mounting. But wait, there's more. This doesn't include the liability from Social Security and Medicare. When you factor these in, the amount according to some, exceeds $120 trillion. With U.S. Federal tax revenue of just over $2.3 trillion, that puts our debt-to-income ratio somewhere around 5,082%. Now let me ask you. If you, as an individual, entered your local bank and asked for a loan with a similar debt-to-income ratio, what do you think the loan officer would say? Would they give you the loan? Now let's return to Bob.
Bob ultimately found employment in Congress where he became one of the biggest spenders on the hill. He was re-elected several times by his constituents as they especially liked how Bob could "bring home the bacon." In fact, Bob became rather wealthy in the process. From his vantage, there was no problem. Besides, as long as the boat remained afloat, everything was fine. However, when the children and grandchildren of his constituents became adults, their tax rate exceeded 75% and lost the desire to work hard since they could only keep about 25 cents of every dollar they earned.
Are we bankrupt? You decide.
Banking:
Do bankers really need nannies?
They are called "on-site examiners"-regulators who work in the offices of large banks to oversee their management, risks and operations.
They are a faceless army-the Office of the Comptroller of the Currency alone has around 500 of them while the Federal Reserve counts hundreds of on-site staff among its 1,800-plus examiners. They are almost unheard of in other sectors. And they are fast becoming an anachronism that should be ended or at least sharply downsized.
The theory is easier to grasp: The idea that the 100 or so examiners stationed at J.P. Morgan Chase JPM +1.56% & Co. may be able to police 260,000 employees sitting on a $2.3 trillion balance sheet is a nonstarter.
The practical experience is trickier. Recent examples suggest that examiners aren't equipped to spot brewing crises but that isn't the whole story.
The huge trading losses at J.P. Morgan, for example, went undetected by on-site sleuths. And last week the OCC was lambasted by U.S. lawmakers for failing to crack down on money laundering at HSBC Holdings PLC.
Some critics argue that examiners sitting in the same bank for several years develop Stockholm syndrome and are unwittingly easy on their subjects. A former regulator was even more explicit: "Name a crisis that was prevented by on-site examiners.".
Aided by the Dodd-Frank law, the number of cops on the financial beat has surged. The Fed, for example, has nearly 40% more examiners today than it did in 2008, but is the financial system 40% safer because of that?
Reducing the number and the importance of on-site examiners would do away with the misleading notion that the banking system can be kept safe by dozens of people who "get their coffee, sit in their offices, and...don't work for us," as Goldman Sachs Group Inc. chief Lloyd Blankfein once put it.
The time has come to wean bankers off their nannies.
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