Early in my legal career, I learned that if it appears too good to be true, it almost always is. In Hollywood’s field of dreams, however, this is an extraordinarily difficult myth to shatter with clients who believe that their creativity will produce a different result. As I sit here writing this, I can’t even think of any exceptions to that rule.
I look out at the shattered expectations of folks who really believed that even though they couldn’t afford a house, somehow they could pay for it because dem bank folks said they could. I stare in horror at the billions of dollars of deal flow and amazingly consistent returns – come hell or high water – generated by a financial mystic, Bernie Madoff, who never explained how he did it. I have too many friends in that mess. I am shocked, but not really surprised, at the vast pool number crunchers, accepting credit rating agency assessments without applying the slightest bit of common sense (“you mean the Emperor really has no clothes?!”), building vast financial empires on the straw of near-valueless derivatives. I look at a government that really believed that a free market could not crash to near-depression depths and a nation could actually fight a sustained war while still lowering taxes.
And then I turn to Europe, folks who laughed and pointed fingers at us early last fall as if they would never behave as our money markets did, where the this managed depression now threatens to unravel the European Union itself. The power of an aggregated European economy – necessary in the eyes of the founders to counter the mega-economic power, particularly the United States, of larger economic nations – would surely be a bastion of solidity, a force that would eventually apply its greater aggregated population with its educational system to be able to survive the onslaught of any large economic power on earth.
As economically second class nations, like Spain, Greece, Portugal and most of Eastern Europe fought to join the EU; those who made it decided that they should live at the same level as their more prosperous European counterparts. They just didn’t have the earning power, yet they thought they should live like “Europeans”… so they did what good Americans have done for a while… they borrowed their way into a seemingly prosperous lifestyle. Life was good… too good to be true.
The souring economy literally “called in” their debt; the piper demanded to be paid. Spain, Portugal, Ireland, Greece… the list goes on and on (focusing on the less performing economies)… watched as their credit ratings plunged. Some countries face literal bankruptcy in their Euro-based economies.
The January 24 New York Times: “‘Membership [in the EU] is not a panacea for a country’s social and economic problems,’ said Simon Tilford, the chief economist at the Center for European Reform in London.
“‘In fact, there has been a huge divergence in competitiveness that shows up in massive trade imbalances,’ he said, comparing Greece with the wealthier euro countries. ‘While Greece may have been insulated from the risk of a currency crisis, there is also the risk of a credit crisis and a collapse of confidence in its solvency.’
“While sharing a currency with some of the mightiest economies in the world helped Europe’s poorer nations share in the wealth, a boon during boom times, in hard times the rules of membership are keeping them from doing what countries normally do to ride out economic storms, including enormous spending.”
The rich European nations, like France and Germany, are applying “rich country appropriate” stimulus packages to their financial institutions, holding interest rates high – demanding that interest correspond with relative risk. Those programs only serve to make weaker EU nations shudder in pain as their cost of money, necessary to struggle to some modicum of survivability, must be kept lower. The “one size/currency fits all” assumption behind the European Union (the UK is the only major EU nation to retain its old currency) appears to be failing fast.
Take Greece for example, where recent riots illustrate the severity of the crisis. The Times: “The omnipotent hand of the Greek state produced a public debt of more than 90 percent of Greece’s total economic output. The relentlessly rising demand of its consumers, who were able to put off the day of reckoning because they enjoyed the shelter of the low-inflation euro, has created a current-account deficit of 14 percent of its gross domestic product — estimated to be the highest in Europe.” In short, the Greek economy is collapsing, and the steps being taken by the stronger European nations to shore up their economic structures only seems to be accelerating an ugly end game.
Applying stress to any system will quickly point out its weak spots. Whether it occurs in a test laboratory, during a California earthquake or a global meltdown, we can see the absolute proof in the maximum that what appears to be too good to be true almost always is.
I’m Peter Dekom, and I approve this message.
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