Robert Reich is one of the few speaking economic truth at a prominent level.

He has been arguing for quite some time that we need to focus on job creation rather than debt reduction, since well before it became more broadly said.

He has argued for quite some time that the widening wealth gap is not only unjust in a way the US was specifically intended not to be, but is also deleterious for the whole nation’s long-term economic health.

Robert Reich is worth listening seriously to.

Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street

by Robert Reich

Tuesday, October 4, 2011

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.

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27 Responses to “European Dominoes”

  1. World economic crisis :follow Dean Swift’s advice :eat the children. Then breed more to guarantee the food supply. No world crisis, just fun

  2. atlantinno says:

    lucky goal…he couldnt finish the goal the first time around and was lucky the rebound parried back into the direction he was runnin towards…incredible goal?
    type in Ronaldo vs if u want to see an incredible goal

  3. The Saturdays and Little Mix in the same room – a true meeting of minds. Maybe they will find a solution to the world economic crisis.

  4. joubzadeel iacopulber says:

    When you are told the same story over and over the people will believe it, Kim Sung Il was present in every aspect of their lives and as a result generations were made to turn stories into fact. Once the source of the story is gone you would feel hopeless and a lot of people do not understand the influence the cult of personality can have the legend of Kim Sung Il was all they had and from comments I think people understand position all based on blind hate which cannot

  5. R’s have shown their concern for rich trumps the economy, & their pledge to Grover Norquist trumps pledge of allegiance the US.

  6. CNBC Europe Troubles Masking Recovery in US: Plosser – Daily tumult from the European debt crisis is drowning out s…

  7. Well they better learn to get along now cause weather they do or they all end up in the same place where the real monsters live…

  8. If I offered you a choice – I could either give you a million dollars, but you can only spend it to attend baseball games, or I could give you half a million instead and you can spend it on whatever you like, what would you choose? If you are not a baseball fan, you’d probably choose the latter. Keeping your cash is more to you than getting tax credits.

  9. The International Monetary Fund believes Spain faces two years of recession as a result of the economic crisis and austerity measures introduced to cut the budget deficit, Italian news agency Ansa Thursday.

  10. cownyannie ori says:

    W/ the US economy seeing a slowdown in 2011, Mexico is again in danger of being entangled in an economic crisis…” :'(

  11. moglunt lyska says:

    A mom of three with money issues due to the economic crisis becomes a prostitute to help her family. THE CLIENT LIST SERIES coming in March

  12. lajmudhela lechevao says:

    As researchers, we all have incredible demands on our time. These demands can quickly snowball, leaving us feeling like things are out of control. This lack of control over your priorities and responsibilities can lead to anxiety and depression and perhaps to dropping out of graduate school. Getting control and developing good time management skills can go a long way towards preserving your sanity and making grad school and a career in academic research enjoyable. All it really takes is planning, and knowing the things to plan for. All these things tugging at you all at once can make it difficult to any single thing -because you feel the anxiety about not other things. Here are seven strategies for controlling your time and priorities, and helping you to cope with time stress.

  13. American here, does not look like American dollars 2:07 2:14 , also it says in the description box that this was made in the UK

  14. kazullman lambig says:

    Will Greece Be Ruled by the Bankers – or Its People?: The Greek economic crisis is often presented as a product …

  15. Facehammer on Update: /r/occupywallstreet allegedly taken over by anti-OWS mods, though at least they’re liberal with the banhammer? Subscribers protest. –

  16. khelandram delma says:

    Obama cut Welfare, He sure didnt cut it for the illegals have been collecting move dillhole right in middle of Depression U created

  17. Asian shares ease on growth concerns, stimulus hopes TOKYO (Reuters) – Asian shares eased on Tuesday on concerns over weakening regional and global… –

  18. schramsuda wata says:

    sir,u r agreatest pm of india,we are safe from world economic crisis becoz of your policies,in delhi bigapple etc sup mkt.but no

  19. heral bes says:

    She’s inside & cries every night, but you can’t see the depression in her eyes, because she hides it behind …

  20. jumadesing brash says:

    Call me crazy, but staple crops are good for the economy. And I want the lower and the middle class to eat like I do.

  21. coshibe corna says:

    BEIJING (Reuters) – China’s vast manufacturing sector saw expansion accelerate in November for the first time in 13 months, preliminary results from a factory survey showed, a sign that the pace of economic growth has revived after seven consecutive of slowdown. The China HSBC Flash Manufacturing Purchasing Managers Index (PMI) rose to a 13-month high of 50.4 in November, the latest indicator of recovery in the real economy after data showing solid credit growth, firmer and rising industrial output in the previous month. A sub-index measuring output rose to 51. …

  22. well, if something like the fair tax went through, sure. But right now the financial bennies of corporatism are poisonous

  23. dietthitri says:

    Lurking_Grue on If you think the billionaires aren’t rich enough, women have too much control of their bodies and workers get paid too much, this GOP is for you. –

  24. Stocks little changed as earnings fail to inspire: NEW YORK – Stocks were flat on Wall Street as the latest rou…

  25. speideerth will says:

    Budget deficit down to the same percent of the economy it was in 1992. Problem now is jobs and growth.

  26. Phew! U.S. can’t join the euro: A look at America’s debt and deficit trouble through the lens of European econom…

  27. antarbacho says:

    I can think of a LOT of ways to use that $$$$$ in this economy. Homes are STILL foreclosing (we are on the verge), no jobs++

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