What a novel thought

What a novel thought that George Papandreou, the Prime Minister of Greece would insist on a binding public referendum for the European Union Greek Bailout Proposal.

George Papandreou has a 2 Vote Majority at best in the Parliament, and many suspect that he does not have that, and he does not want to find out the hard way.  The easiest decision to make is to let someone else make that decision, the blame is theirs not yours.  Of course you can advise them on the decision that they are being asked to make, but the fallout is theirs alone to bear.

If the people of Greece pass the referendum Mr. Papandreou will be able to say “I did not force this upon you, a majority of your fellow citizens agreed to accept this burden”.  The main problem will be that however the outcome of the vote the effects will not only affect the current generation it will be on at least the next two generations.  If the citizens of Greece pass of the life line with anchor attached, and then decide that Greece needs to go in a different direction, well so be it, again the choice was theirs to make and theirs to bear.

Greece might have been the birthplace of democracy, but since the end of World War II it has not spent much of the time in a stable democracy.  Greece history since World War II has been anything but stable.  About the only thing stable was the name.

Since the end of World War II some 67 years there have been 48 different governments in Greece.  Just a crude back of the envelope calculation would indicate that the average Greek government has a half-life of 8.4 months.  Mr. Papandreou must be doing something right considering that he is currently at 2.85 half-lives.  It could also mean that the situation is so balled up that no one in his or her right mind would even consider taking the position. (My condolences, You have won the election and you are the new Prime Minister).

The European Proposal has nothing to do with Greece, but everything to do with its own major banks, and the really sloppy practices (Regulators and Banks) that they have been operating with for at least past 10 years.

The various powers that are in place with banking over sight functions failed, and they failed big.  The data was there, and it was available, either by sheer incompetent or criminal collusion it was not acted on.

It was not an either or situation I believe that it started out with incompetents, and then graduated to criminal collusion.  Some of this incompetent is a result of deliberate/legislative blurring of the lines between commercial and investment banking.  Some of this incompetent was due to lack of experience with investment banking, or the assumption that investment banking was just like commercial banking.

That said when the various individual operating the banks started to make large amounts of loans to the Greek Government, and the incompetent regulator did not call them on it, and for that fact neither did their Board of Directors nor the stockholders.  Who wants to stop the elevator on the way up (The ride is really great counting those unrealized gains)?  The management of the Banks recognized this fact and jumped in with both feet, and just compounded the problem. (our depositors are demanding their interest payments, and I need my bonus)

Greece was writing IOU (they were not the only ones), Backed by the Full Faith and Credit of the Greek Government in a currency that they did not control.  The Investment Bankers where getting fat commissions and fee helping them write and place the IOU.  The Basel Treaty inadvertently provided a ready market for all the paper that was being created (Tier I Assets Requirements, the mistaken assumption between Zero Risk and No Risk, and that Sovereign Debt is “Riskless”) Zero Risk is relative, and No Risk is Absolute, the former is real and it is continually changing to reflect the current conditions.  The later is a figment of the mind and a delusional mind at that.

The European Governments do not want the Greek government to default.  A Greek debt default would trigger the first way of various Credit Default Swap agreements.  Since the Credit Default Swaps are not regulated (they are not regulated anywhere) no one has any idea of the magnitude of the counterparty risk, but if the experience of the United States is an accurate example we will all find out in rather short order.

Europe stands at the edge of the abyss, and I am afraid that they will fail the test.  In 2008 when the United States stood at the edge of the abyss the decision was easier to make since the states are united by form and function (Constitution, laws, monetary, de facto common language, common national history), we fought a civil war to establish most of these facts.  Europe has not had this experience (most of their wars have been just the opposite).  Europe in practice is not united by form and in reality by function.  Europe carries a tremendous amount baggage from its past, that makes it easier to be separate rather than united.

The term “common good” does not ring true in Europe, for Europe.  Common good does have resonance for the people only as it applies to their nation.  The lack of trust between the various members of the European Union is palpable, and in many case lies just beneath surface.  Any significant economic distress will bring this to the surface with all of attendant ramifications.

Many of the older and middle-aged Germans are scarred by the experiences economic turmoil of the Weimar Republic, and the initial post war period, in particularly their treatment at the hands of inflation and hyperinflation.  Many Germans are myopic and rather emotional on this subject (So are the Italian, French, you name them).  In many cases these Germans will not admit, much less understand that they benefit from this expansion of debt in Europe.  Many will not recognize that the debt allowed German industries to sell goods and services abroad.

Many of these Germans enjoyed the trip going up, but they are not looking forward to the trip down.  Many of the German that I talk to express a strong belief that this situation is only isolation to Greece, or maybe to the Southern Europeans, and that the effects will somehow by magic be isolated to these areas.

The various European governments, and for that matter the United States, are not coming clean with the various electorates as to just how vulnerable their countries are visa vie the risk in their respective financial systems (The United States passed the Dodd-Frank Bill and now we can sleep safe at night (NOT)).

The world has had sixty some years of peace in Europe, but this could be coming to an end in the coming years.  I hope that I am really wrong on this point.

Germany is the only European country with the financial resources to address this debt issue, unfortunately it will not address it, the internal political costs are too great, and the political cost of not addressing it are a matter for another day, and possibly another German Chancellor to address.  Regardless of the decision the People of Greece make it, the out come will not be good for Greece and the European Union.