Wednesday, October 05, 2011

The Perfect Storm

Two major economic problems seem to be converging like the perfect storm.
The economic problems facing the EU as a nascent confederation and the economic problems facing the USA.

Pundits believe both problems arose because of greed, corruption, and mismanagement. Greedy bankers, corrupt politicians, lousy managers.

The derivative stuff has been analyzed to death. Regulators either not doing their jobs or looking the other way. Mortgage companies chasing the buck so hard they didn't see they were riding into a barbed wire fence. Heads of companies, and government agencies, who believed Alan Greenspan, remember him, when he said that derivatives were good for the economy.

Greenspan expected the financial market bosses to act like gentlemen. He forgot, they never have. Not in the days of the tycoons like Rockefeller, Gould, and Morgan, not in the days of Morgan Stanley, and Lehman Brothers, and not today.

That tsunami of bad loans brought down banks around the world, in the USA, and in Europe. One of the EU's problems today is the debt some of the European banks suffered in that mortgage pyramid scheme.

Worse, though, is the EU's mistakes. A couple of decades ago Ireland was a wasteland. Tractors were small, cars were old, farms were barren, and farmers poor. The Irish blamed the British, claiming that the Brits kept the price of Irish goods below the poverty line. Then came the EU and the ECB, with money to finance projects, allow farmers to buy and sell Irish goods in Europe at fair market prices.

One farmer was visited by an EU representative. The farmer was poor. But his sheep and their wool, and their meat, were being exported to the EU for good money. The EU guy found a stack of checks on the farmers desk. Checks the farmer didn't know what to do with since he'd never really been paid before, at least not by check, by the Brits. After he began cashing the checks the farmer was no longer poor.

Other businessmen applied for EU loans through banks approved by the ECB, banks recommended by government officials. Okay. That's their job, isn't it? Recommend businesses that will grow and boost the economy? Only that's not exactly what happened. Politicians and government officials got kick-backs for recommending banks, or their cronies, for loans. Loans which were never repaid.

Take the case of enlarging the tiny port in the Greek island of Foligandros, in the Cyclades. Only relatively shallow-water ferry boats can come into port. Actually a broad concrete pier about 50 meters long and ten wide.

Eva, the British-born owner of Eva's coffee shop, at the tiny port, said that the EU had lent money to the Greek government, and that government to a bank, and that bank to a contractor, who was going to expand the port, dig down and make the seabed deep enough to accommodate cruise ships.

Foligandros has no airport. has an area of about 32 square kilometers and Is only 10 km long. Has a population of about a 600 people. And 42 small hotels. Tourism is the main industry. Well, that's not true. Tourism is the only industry. In fact, Foligandros, like Greece really has no other industry.

The Greeks don't make cars, washing machines, or plastic hangers, like Turkey. They don't have high-tech or even low-tech. They have tourism.

Athens, according to observers, is a city that services the tourism industry around the country through accounting firms, banks, travel agencies, the airport, the ports, whatever. The schools, from bottom to top, produce people who will either work in the tourism industry, unless they're academics or soldiers, or leave the country. Or go on strike.

On the islands, the taxi drivers, the bellboys, the kitchen help, the cooks and waitresses and maids come from Albania or Bulgaria. Greeks, observers say, don't do manual labor.

Santorini, about 45-minutes away by ferry, has a population of about 14,000 people. In the summer the population can double in a single day when half-a-dozen cruise ships, each carrying over two thousand people, pull into the deep water ports. Skiffs then unload the passengers for their day of shopping and eating and touring, then bring them back. At nightfall the cruise ships bellow a loud goodbye and sail away.

In Foligandros the planned bigger port never got dredged. The contractor went broke. So what happened to the money? The money the EU gave to the government who lent it to the bank who gave it to the contractor? Gone.

This story, we were told, is common. In Ireland, Greece, and probably other countries. The old boys made money for each other and left the well-meaning EU folks with the check.

One analysts says this is the fledgling EU facing growing pains. Unlike the USA, with a long history of confederation, the EU is a relative infant. Should the EU geniuses figure a way to solve the problem of greedy bankers, businessmen and politicians, the EU may not only last, but become a dynamo.

Of course, with the USA as an example, keeping greed and corruption under control is no mean trick. Where were the regulators when the toxic derivatives were flourishing? Or to a lesser extent, when Madoff was ripping off his own people? Did these officials, entrusted with a watchdog role, fall asleep and let the burglars in, or were they paid to take a walk around the block while the house was stripped bare?

Some folks are saying that not every country is ready for democracy, for an EU. Greeks are striking in the streets. One man identified himself as a good tax-paying citizen, a firm member of the middle-class. He was striking because he thought the EU had no business telling him how much tax he had to pay. That was an internal Greek matter. He seems to stick his head in the sand when it comes to admitting that the Greeks borrowed the money and have to pay back the EU lenders.

Will the Greek attitude prevail? Will the hand out for more continue? Will the high unemployment continue? Will the Albanians and Bulgarians keep making money while the Greeks take unemployment checks?

The problems are in the city, Greeks told visitors. The wealthiest people are in the Islands. There is no poverty in the hinterlands, just in the cities. The traditional farms still provide a basic living. The tourist industry makes those involved wealthy. Those involved in services in the cities are the ones suffering, now.

And in some ways that is the same problem in the USA. If a country relies on one industry for income, pundits say, that is a recipe for disaster. In Greece there is not enough money from tourism to support the folks in Athens. In the USA most of the major manufacturing jobs have been outsourced to China, Turkey, and Mexico.

What this means, says one observer, is that both the USA, and those counties in the EU facing problems, have to go back to basics. Create jobs in more creative ways. Open factories. Stress buying local goods. Create an economy that beats with a healthy heart not one supporting a fat lazy body with clogged arteries.

If the EU and the USA don't get in shape, flush out the fat cats who are draining the system by reaping in cash through outsourcing but taking jobs away from those in their own county, corrupt officials knowingly giving out bad loans, okaying phony construction deals, looking the other way when 'derivative' schemes pop up, then the perfect storm may well form, wiping out society as we know it.