Global Financial Crisis

What Europe’s New Debt Crisis Means for Americans

The dislocations from the worldwide, economic meltdown aren’t over by a long shot.  Nearly two years after Bear Stearns’ collapse, the crisis continues to generate a stream of nasty twists and turns.  Most of these developments have global dimensions, almost all of them are highly complex and only partly understood, and many require rapid responses that have to be carried out under relentless public and partisan scrutiny.   This constitutes the largest policymaking challenge since the dawn of the postwar era in foreign policy and international economic arrangements.  

The most recent, nasty twist is the specter of a sovereign debt default in Greece.  Technically, it means that Greece is running such large deficits, relative to its economy and private savings, that it may find itself unable to finance them while also servicing and refinancing its existing debt.   In practice, financial speculators betting on default are now intensifying pressure on Greece.   Countries default on their debts regularly – it’s virtually a national habit for places like Argentina – but the economic crisis makes this situation different.  First, the government bonds of Greece and countries like it are held mainly by Western financial institutions such as Citigroup and Deutsche Bank.  Another round of big losses for them will mean more delays before normal credit flows to businesses resume, which in turn will mean slower growth, and longer and higher unemployment, for Europe and the United States.  

The second ugly twist is that Greece is not alone.  For months, international finance experts have worried about the sovereign debt status of not only places such as Portugal, Ukraine and Lithuania, but also Ireland, Spain and Italy.  These concerns will heighten if Greece’s debt goes down, which in turn could make additional defaults more likely.   And if the debt of a major country fails, we could find ourselves back to the financial conditions of Autumn 2008, but this time with much less fiscal and monetary capacity to address them.  

While even President Obama couldn’t explain a U.S. taxpayer bailout for Greece, its implications for the European Union have convinced Germany to let the Union provide a safety net.   While Greece represents just 3 percent of the EU’s total GDP, Greece is part of the Euro zone.  So a Greek debt default would trigger a crisis for the Euro – and a Euro crisis in turn would drive up interest rates across Europe and choke off their recovery.   The EU bailout of Greece will have its own costs, however, since it demonstrates that the EU cannot enforce its own, basic rules on deficits and national debts.  That lesson will also weaken the Euro -- which means a stronger dollar later this year and weaker U.S. exports to help pull our own economy out of its ditch.  And if another Eurozone nation faces default in coming months, especially a large economy like Spain or Italy, the Union won’t have the means to do much to stop it. 

America, of course, has its own serious problems dealing with deficits and national debt.   The GOP “party of small government” won’t agree to President Obama’s proposal to create a bipartisan commission to tackle the long-term problem, something Republican presidents and leaders had supported until Obama won the White House.  GOP congressional leaders also have said no to pay-as-you-go rules to limit future deficits – rules they also liked in the 1990s – because paying for future tax cuts could mean fewer of them.   In places beyond Washington, where economic sanity still rules, contemplating tax cuts in the face of trillion dollar deficits would make no sense.  And even Ronald Reagan, the fiscal godfather of today’s GOP leaders, agreed to large tax hikes on business (1982), payrolls (1983) and energy (1984) when he faced unmanageable deficits.   Yet, even George W. Bush’s catastrophic example of what happens when a serious recession collides with large underlying deficits hasn't convinced them to reexamine their talking points on tax cuts. 

That’s one reason why the rating service Moody’s acknowledged last week that it might downgrade America’s debtor status from AAA to AA.   A downgrade remains pretty remote -- unless the economy swoons again, coming this time on top of a $1.4 trillion deficit instead of a $400 billion one.   And debt defaults by Greece and another country could certainly trigger such a swoon.  As it is, Greece’s problems have produced billions of dollars in speculative bets on Wall Street against the Euro.  In fact, these bets follow recent and even more widespread Wall Street speculation against the dollar, winning bets which produced the record profits and large bonuses reported recently by Goldman Sachs and others.  

All of this confirms with disheartening certainty that the forces which created the global economic crisis are still with us, and most of the policy challenges remain unmet. 

FCIC Chairman Phil Angelides to Address NDN on February 2

Phil Angelides

On Tuesday, February 2, NDN will host an address from Phil Angelides, Chairman of the Financial Crisis Inquiry Commission. Formerly the Treasurer of the State of California, Mr. Angelides has been charged by Congress to lead the effort examining the causes of the worst financial crisis since the Great Depression.He will discuss the commission's work, which began in earnest this month with much anticipated hearings. NDN Globalization Initiative Chair Dr. Robert Shapiro will introduce Mr. Angelides and open with the event with contextual remarks.

The event will begin at 12pm and lunch will be served. A live webcast of the event will begin at 12:15pm. Seating is limited and is reserved on a first come, first served basis, so please RSVP soon.

Financial Crisis Inquiry Commission Chairman Phil Angelides:
"Examining Our Financial Past to Secure Our Economic Future"
Tuesday, Febraury 2, 12 p.m.
NDN: 729 15th St. NW, 1st Floor
A live webcast will begin at 12:15 p.m. ET
RSVP  :  Watch Webcast

About the Financial Crisis Inquiry Commission (FCIC)
The bi-partisan 10-member Financial Crisis Inquiry Commission was created by Congress and is charged with examining the causes of the financial meltdown.  It is also examining causes of the collapse of major financial institutions that failed or would likely have failed had they not received exceptional government assistance.  The Commission is comprised of Chairman Phil Angelides, Vice Chairman Bill Thomas, and Commissioners Brooksley Born, Byron Georgiou, Robert Graham, Keith Hennessey, Doug Holtz-Eakin, Heather Murren, John W. Thompson, and Peter Wallison.  Findings and conclusions are to be presented in a formal report to Congress and the President by December 15, 2010.

President Obama Proposes Strengthened Financial Regulation

President Obama today announced a set of stronger-than-previously-proposed restrictions on financial institutions. Here's part of the White House's statement:

President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers

WASHINGTON, DC- President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President's economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout.  It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

1.   Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2.   Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector.  The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

For more on the nature of the nation's financial system, NDN will be hosting an address by Phil Angelides, Chairman of the Financial Crisis Inquiry Commission, on February 2. 

FCIC Chairman Phil Angelides on “Examining Our Financial Past to Secure Our Economic Future”

On Tuesday, February 2, NDN will host an address from Phil Angelides, Chairman of the Financial Crisis Inquiry Commission. Formerly the Treasurer of the State of California, Mr. Angelides has been charged by Congress to lead the effort examining the causes of the worst financial crisis since the Great Depression. He will discuss the commission's work, which began in earnest this month with much anticipated hearings. NDN Globalization Initiative Chair Dr. Robert Shapiro will introduce Mr. Angelides and open with the event with contextual remarks.

The event will begin at 12pm and lunch will be served. A live webcast of the event will begin at 12:15pm.

About the Financial Crisis Inquiry Commission (FCIC)
The bi-partisan 10-member Financial Crisis Inquiry Commission was created by Congress and is charged with examining the causes of the financial meltdown.  It is also examining causes of the collapse of major financial institutions that failed or would likely have failed had they not received exceptional government assistance.  The Commission is comprised of Chairman Phil Angelides, Vice Chairman Bill Thomas, and Commissioners Brooksley Born, Byron Georgiou, Robert Graham, Keith Hennessey, Doug Holtz-Eakin, Heather Murren, John W. Thompson, and Peter Wallison.  Findings and conclusions are to be presented in a formal report to Congress and the President by December 15, 2010.

Location

NDN Event Space
729 15th St. NW First Floor
Washington, DC 20005
United States

AIG's Bonuses - More Than Expected

Josh Marshall is reporting tonight that the total amount of bonuses being paid out by AIG is way more than expected. Hundreds of millions more. 

Remember AIG has received more money than is contained in the entire home foreclosure initiative, and almost half as much as is in the first year of the stimulus plan just passed.  The sums are staggering. 

I assume the Administration's response to this will be swift and certain - and unpleasant for AIG and others involved.  

Syndicate content