Today Ben Bernanke added his voice to those who are worried about Europe's debt crisis.
But why exactly should America be so concerned? Yes, we export to Europe -- but those exports aren't going to dry up. And in any event, they're tiny compared to the size of the U.S. economy.
If you want the real reason, follow the money. A Greek (or Irish or Spanish or Italian or Portugese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008.
Financial chaos.
Investors are already getting the scent. Stocks slumped to 13-month low on Monday as investors dumped Wall Street bank shares.
The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That's no big deal.
But a default by Greece or any other of Europe's debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.
That's where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle.
The Street's total exposure to the euro zone totals about $2.7 trillion. Its exposure to to France and Germany accounts for nearly half the total.
And it's not just Wall Street's loans to German and French banks that are worrisome. Wall Street has also insured or bet on all sorts of derivatives emanating from Europe -- on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.
Get it? Follow the money: If Greece goes down, investors start fleeing Ireland, Spain, Italy, and Portugal as well. All of this sends big French and German banks reeling. If one of these banks collapses, or show signs of major strain, Wall Street is in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.
That's why shares of the biggest U.S. banks have been falling for the past month. Morgan Stanley closed Monday at its lowest since December 2008 -- and the cost of insuring Morgan's debt has jumped to levels not seen since November 2008.
It's rumored that Morgan could lose as much as $30 billion if some French and German banks fail. (That's from Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks.)
$30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)
But Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has probably taken out insurance against its loans to European banks, as well as collateral from them. So Morgan feels as if it's not exposed.
But does anyone remember something spelled AIG? That was the giant insurance firm that went bust when Wall Street began going under. Wall Street thought it had insured its bets with AIG. Turned out, AIG couldn't pay up.
Haven't we been here before?
Republicans and Wall Street executives who continue to yell about Dodd-Frank overkill are dead wrong. The fact no one seems to know Morgan's exposure to European banks or derivatives -- or that of most other giant Wall Street banks -- shows Dodd-Frank didn't go nearly far enough.
Regulators still don't know what's happening on the Street. They have no clear picture of the derivatives exposure of giant U.S. financial institutions.
Which is why Washington officials are terrified -- and why Treasury Secretary Tim Geithner keeps begging European officials to bail out Greece and the other deeply-indebted European nations.
Several months ago, when the European debt crisis first became apparent, Wall Street banks said not to worry. They had little or no exposure to Europe's problems. The Federal Reserve said the same. In July, Ben Bernanke reassured Congress the exposure of U.S. banks to European nations in trouble was "quite small."
Now we're hearing a different tune.
Make no mistake. The United States wants Europe to bail out its deeply indebted nations so they can repay what they owe big European banks. Otherwise, those banks could implode -- taking Wall Street with them.
One of the many ironies here is some badly-indebted European nations (Ireland is the best example) went deeply into debt in the first place bailing out their banks from the crisis that began on Wall Street.
Full circle.
In other words, Greece isn't the real problem. Nor is Ireland, Italy, Portugal, or Spain. The real problem is the financial system -- centered on Wall Street. And we still haven't solved it.
Robert Reich is the author of "http://www.amazon.com/Aftershock-Next-Economy-Americas-Future/dp/0307592812" target="_hplink">Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
Erik
http://eaprince.blogspot.com
Why Barack Obama refuses to avail himself of their knowledge and wisdom is one of the great mysteries of the Obama administration. Obama's unfavorability rating (the different between those support him and those who disapprove of him) has been growing in the negative direction a point every couple of days. At this rate, Obama will soon be so far in the hole that he will have no hope of winning a second term.
All the more reason to wonder why Obama never learns, never questions his earlier conclusions, never considers replacing his failed financial advisers. Who is really running this country? It's clear that it's Wall Street and corporate interests who control our politicians who appear to be ignorant puppets. Why is Tim Geithner still Secretary of the Treasury? There can be no answer except that Obama sold out to greed.
We would all do well to read the Declaration of the Occupation of New York City:
http://nycga.cc/2011/09/30/declaration-of-the-occupation-of-new-york-city/
As has been observed, they patterned their declaration on The Declaration of Independence.
In other words, they began with a list of grievances before making a list of demands; offering solidarity with anyone - left, right, Republican, Democrat, Tea Party . . . anybody - that believes that the entire world is off the tracks and Wall Street is the center of a broken system that IS NOT a free market - rather, it is a plutocracy, plain and simple; not in the interests of small businesses, entrepreneurs, white collar workers, public or private sector working folks . . . no one is served by the current perversion of the free market by the 1%.
We The People are the 99%.
This DOES NOT have to continue. We need only be engaged . . . OUT OF APATHY AND INTO ACTION.
And that, of course, presupposes a willingness to dialog with EVERYONE - not just those that agree with a progressive perspective, but with conservatives and centrists and political agnostics . . . EVERYONE . . . all of us . . .
The 99%.
Erik
http://eaprince.blogspot.com
If I go down, then everyone goes down.
That's too bad.
I don't believe you. If you bet on Europe, then you lose if they go under.
Fortunately no studies are needed to figure what regulations should be applied to the banking industry today. Pull out the regulatory framework from any year from 1930 to 1980 and presto, job done. If you think they should be tweeked a tad to fit today's new realities, than fine, tweek 'em a tad but only a tad as they worked very well for many differing economic times for 50 years so the basics are there to copy. Now all we need is a government with the will to do it !!
not "saved the economy".
Because every TBTF is exposed to a global financial system built upon 1.5 Quadrillion in worthless derivatives and credit-default swaps, they are all hopelessly BANKRUPT!
Adopt Glass-Steagall worldwide to erect a firewall between the public and a hopelessly doomed, utterly bankrupt Wall Street/City of London and let the financiers FAIL, choking on their own losses.
All three branches of our government are failing. There is no check or balance on power and concentration of wealth. This situation is unprecedented in the US.
Problem is it's TOO centered on Wall St. not on the rest of the economy aka Main St.
Investors just just EAT IT, they can WAIT not get paid quickly enough and not as much, I mean really what's Europe gonna do, they can't abscond to South America, they are still gonna be here, they aren't going anywhere, apparently NO ONE remembers NYC's default and Orange County default-they are still here, people still live there and go to work everyday, stuff is still being made, services are still being provided, the world did not end........jeez C'mon Wall Street YOU AREN'T ALL THAT!!!!!!!!!!!!
None of the banks asked for any bailout.
The bailouts were pushed by Paulson and the Liberal Democrats in Congress.
Most banks didn't want any of those forced loans.
The bailout was a bail out of Washington DC.
Never forget that.
The government relies on borrowing. They owe 14 Trillion now and they need that pipe line to stay open.
I refuse to continue to allow corrupt Right Wingers like Peter007 to mytholoigize our founders in their non-scientific, ill-informed alternate universe. His beliefs are the opposite of truth.