In a way, we have all become Greece. The common element to democratic countries everywhere is a willingness to allow public debt and deficits to gallop out of control and to permit politicians to ride those horses to the edge of financial oblivion as they promise a better world all along the way.
Is the Eurozone bailout going the way of the infamous U.S. TARP? There are reasons why the initial EUphoria over the one trillion dollar package, hastily pulled together by the IMF, the European Central Bank and EU governments led by France and Germany last weekend, should give way to some sober second thoughts.
The scheme offers no stimulus to Europe’s sluggish economies and amounts to already heavily indebted countries going into even more debt to bail out others in seriously crippling debt. No doubt it will generate profits for bond traders and make Goldman Sachs wealthier. But what will it really do for countries experiencing economic downturn? Forcing Greece to take on and pay back more debt and loans at a time when citizens are facing a firestorm of draconian spending and pay cuts, mounting unemployment, slashed pensions, higher taxes and lack of confidence in the future is not an economic strategy. It is a formula for social upheaval and the worst kind of extremism that once before left Europe in flames.
There is no certainty that the scheme will prevent a default by Greece either, even if everyone in the country were rowing in the same direction, which clearly they are not. The IMF seems certain to inflame conditions, not improve them, given its record. Not even the prospect of a trillion dollar bailout could get the Euro to rise. It continues to slump, imposing what amounts to an added tax upon the citizens least able to afford it.
Related currency swaps with the U.S. will mean that the Fed’s already bloated balance sheet will balloon further, ultimately leaving U.S. taxpayers on the hook for those commitments. Currency swaps were all the rage in late 2007, when they were entered into by various global central bankers and the Fed in the hope of combating the credit crisis. They did not live up to those expectations.
We were among the first voices to express skepticism about the TARP, which was never used for its intended purpose and over which members of Congress and the general public have repeatedly registered chagrin. The EU fund created by an unusual, perhaps worrisome, coalition of central bankers and various governments is also facing a clash with sectors of the public and opposition politicians. The fund was cobbled together too fast with little creativity or imagination and a level of recidivism regarding debt that is as mind-boggling as the sum involved. It was done without the slightest bit of consultation with the public. The TARP, too, was heavily criticized for many of the same shortcomings. It never shook loose of its tattered image as a result.
The emergency fund was created in the hope of avoiding something called contagion, where one country’s ills would affect another and eventually spill over into North America. But here is the real contagion concern: in a way, we have all become Greece. The common element to democratic countries everywhere is a willingness to allow public debt and deficits to gallop out of control and to permit politicians to ride those horses to the edge of financial oblivion as they promise a better world all along the way.
Not every nation sees rioting in the streets as we did with Athens, but in democracies throughout the world there is an unsettling and growing gap between those at the top of government and business (and central banks, to be sure) and ordinary citizens. Trust in major institutions to do the right thing has rarely been in shorter supply. Populism is on the rise. In the United States, querulous voters are in a mood to throw out Washington incumbents. That trend also spilled over to Europe where Angela Merkel’s party last weekend lost key regional elections and Gordon Brown’s government was forced to resign after defeat at the polls. The toppling of icons like three-term Republican Senator Robert F. Bennett of Utah, who lost his party’s nod for a fourth-term last weekend, is as frightening to political insiders as any rock-throwing mob. People are looking to narrow the gap between those at the top and everyone else; they want to be viewed as more than a stepping-stone for self-aggrandizing politicians and a cheap source of capital for the financial world and Wall Street. They want a fair deal and honest talk, not Fed speak or talking point spins that rattle any lie detector within a ten mile radius.
We will know progress is being made when we hear the word “trillion” a lot less often and when we find central bankers and politicians who view bailouts and deficits as symptoms of a chronic problem and not the knee-jerk solution they have been turned into.
What is happening in Greece and elsewhere in Europe should cause leaders to recall how easily the seeds of disaster are sewn amid the winds of resentment and desperation.
Sixty-five years ago, the Allied forces accepted the unconditional surrender of the German military regime, bringing an end to the war in Europe. It took formal effect on this day in 1945. The Third Reich, and the once-underestimated monster who led it, Adolph Hitler, were dead. Tens of millions perished. Great cities of the world lay in ruins. The folly of Versailles in 1918, and the miscalculations made in dealing with a discontented Germany in subsequent years, proved more costly than anyone ever could have imagined. It was the 20th century’s ultimate breakdown in governance, leading to the most horrific ordeal the world has ever known. Hitler was a madman, of course, but he was an elected madman born of a democracy and a time when hunger and dejection drove people to desperation. Many Germans saw a man on a white horse who offered them hope; they could not see, or did not want to see, the monster who was a horseman of the apocalypse.
Today, much of Europe is in the throes of a firestorm of a different kind. Many of its countries, including Spain, Portugal and Greece now struggle under the jackboot of massive debt and unemployment. Bands of discontented Athenians riot under the shadow of the Acropolis. Uncertainty is knocking the value out of the EU’s currency and anxiety again grips financial markets on a global scale. Across the old world, fear has once more taken to the saddle and is galloping to unknown destinations. It may well arrive in North America, as this week’s sudden drop of nearly 1000 points in the Dow possibly augurs. An important measure of stock market volatility has skyrocketed in recent days. The interest rate at which banks lend to each other, known as LIBOR, has also spiked, as it did during the credit crisis of 2008.
As the leaders of the EU meet this weekend in Brussels to deal with the economic crisis in Greece, they would do well to remember the nightmare — a nightmare when psychopaths controlled every lever of government and when torture and fear became its reserve currency — that finally ended in a red schoolhouse in Rheims in the early hours of a cold May morning long ago, but which began decades earlier with the misjudgments of the old men of Europe who set it in motion. The seeds of disaster are easily sewn amid the winds of resentment and desperation.
For many, this period is a timeless reminder of why governance matters and why power must always be tempered by the utmost respect for the individual. When people champion the need for leaders who are grounded in reality and driven by honesty, when they accept no less than the highest standards of transparency and accountability in the running of major institutions and stand up for responsibility in the boardroom, when they declare that the powers of government, and increasingly, of great economic might, are powers held in trust for the ultimate benefit of all society, they are giving testimony to those painful lessons of the past and honoring their debt to those who sacrificed to preserve their freedoms.
The crisis that is unfolding in Europe is in many ways the product of men and women who also failed to anticipate the unintended consequences of their decisions and were oblivious to the mounting costs of their profligacy. Today’s leaders ought not to repeat the folly of the past by forgetting what horrible events can be unleashed when ordinary people are forced by despair into the dark corners of intolerant and facile worlds where monsters dutifully await their call.
Panic makes an encore appearance after Wall Street’s record drop. America’s leaders do not.
The word perilous hardly begins to describe the times. Much of the world’s economy is only beginning to see daylight after the financial storm of generations. Trust in Wall Street and the mechanisms of government is at record lows. In Europe, Athens riots on a daily basis and the rest of Greece approaches economic freefall. The financial health of Spain and Portugal is fragile. The prospect of contagion remains real. Talk of bailouts again abounds. This time it is governments rescuing one another, with the outcome far from clear as to where or when it will end and at what cost. World currencies are gyrating in unsettling ways while an eerily upward creeping Libor rate makes an unexpected comeback. Then, out of the blue, the Dow plunges by nearly 1000-points in a matter of minutes before closing down 347 points. Panic makes an encore appearance on Wall Street.
You might have thought if there were ever a time for leaders to personally take center stage and be seen, it would be today. But President Barack Obama did not appear to offer any reassurance. There were no words from Treasury secretary Timothy Geithner to calm the markets. SEC chairman Mary Schapiro remained incommunicado, as she has for much of her term. Her office issued a press release, which will likely have about the same impact as the commission’s feeble early investigation of Bernie Madoff.
This is not the way to deal with the biggest point drop in the history of the New York Stock Exchange, much less the fragile commodity called confidence. The turmoil on Wall Street and around the world is raising many questions. Answers, not silence, are needed from a nation’s leaders.
Update: May 7, 2010 10:46 AM ET
Well into the trading day and with no explanation yet for the sudden plunge just short of 1000 points yesterday, volatility now at a 52-week high, and mounting financial turmoil in Europe, neither the President, Treasury secretary or Chairman of the SEC has personally appeared before the cameras or the media to provide any clarifying information or reassurance. The heads of the NYSE and NASDAQ are pointing fingers at one another and rumors abound that the record drop was prompted by the liquidation of a hedge fund. World currencies are continuing to experience wild swings and investors, direct and indirect, are beginning to experience a bad case of nerves again. North American stock markets are in the fourth day of a serious slide.
Is anyone getting this in Washington?
Corporate governance at the failed Wall Street giant had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. Finally, Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Former Bear Stearns CEO James Cayne will be making a rare public appearance this week when he testifies before the Financial Crisis Inquiry Commission. Other top executives from the once thriving firm that was a fixture on Wall Street for nearly a century will be giving evidence as well. It will be an ideal opportunity for the Commission to explore the role that questionable corporate governance practices played in Bear Stearns’s failure. We set out our views on that subject in a two-part posting called “Did Bear Stearns Really Have a Board?” in early 2008. They can be viewed here and here. They remain among our most widely-read columns even today. Our comments were quoted in The New York Times reviewed book “Money for Nothing” by John Gillespie and David Zweig.
Corporate governance at Bear Stearns had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. The most strenuous task of the all-male board seemed to be lifting the rubber stamp embossed with “yes” for gigantic bonuses and anything else management wanted. Only at the very end did the directors even faintly awaken to their duties, after the sudden shock of seeing that no one was at the controls of the engine that was speeding toward catastrophe and realizing that it was too late to retreat to the heavily curtained sleeping car where they long resided.
As we said back in March 2008:
Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least. The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.
We concluded by suggesting exactly the type of inquiry that is occurring under the Congressional appointed commission headed by Phil Angelides
When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions. It should start with the Bear Stearns board.
Finally, a window of Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Collectively, in their pivotal appearance before Congress, Goldman’s top performers could not muster the sincerity, transparency or gravitas of a used car salesman. It is unlikely to play well on Main Street.
Nothing illustrates the folly and arrogance of Wall Street more than the appearance of the Goldman Sachs executives who testified yesterday before the Senate Permanent Subcommittee on Investigations. Rarely has such a group of men (of Goldman’s seven past and current employees who appeared as witnesses, all were men) so graphically confirmed Main Street’s jaded image of Wall Street. Collectively, the best Goldman had to offer in their fields could not muster the sincerity, transparency or gravitas of a used car salesman. Their failure to give clear answers even extended to a refusal to acknowledge the duty to act in the best interests of clients. To many watching the performance, the only conclusion is that they are so used to acting in their own interests that they are unable to understand a larger sense of duty. This is often what happens when great wealth arrives to youth before maturity and wisdom have made an entrance.
Whatever skills these people were paid their millions for, memory did not seem to be among them, with so many constantly claiming they did not know or could not remember key facts and events. Goldman’s CEO Lloyd Blankfein offered little more in his grasp of details. One might have expected that someone who was paid well in excess of $100 million over the past five years and heads what is widely regarded as the world’s preeminent investment banker would be able to manage the tasks of stringing words together in complete sentences and in persuasive thoughts. As the English language is not yet something Wall Street has learned to monetize or short, those skills do not appear to matter there. They do to Main Street.
If, having played a central role in the worst financial meltdown since the Great Depression and needing the injection of hundreds of billions in public funds to keep it solvent, Wall Street — and especially its most illustrious icons — cannot manage to explain what they do and why in a coherent fashion to the satisfaction of Main Street, if they cannot project a sense of ethics and purpose that goes beyond self- interest, if their values appear disconnected from reality and the value they add to society seems only synthetic and contrived, the need for fundamental reform in both the culture of these institutions and the laws that regulate them is more urgent and far-reaching than anyone has yet imagined.
