While Goldman executives blabber before Congress and Alan Mulally’s Ford seems to be doing well, the markets are roiled by the downgrading of Greek government debt to junk status. And they should be. Commentators keep worrying about the “contagion” of the so-called sovereign debt crisis, not only in Greece but also Portugal, Ireland and even Spain.
But the deeper problem will sound familiar: Overexposure of European banks and the complex, opaque instruments into which the debt has been sliced, diced and sold over and over. In other words, systemic risk that may well not be confined to the PIGS, but could spread to Germany, France, Britain (Goldman’s involved, too, but no doubt will profit). Too-big-to-fail banks playing risky games, dangerously interconnected.
This is the housing crisis deja vu. Repeated reassurances the worst is over, the crisis is “contained,” then another shoe falls out of the closet. Is America’s financial system safe from the fallout? It’s a bad time, amid a fragile rebound, for another surprise.
It’s instructive to compare this with the Asian financial crisis of 1997. Thailand, South Korea and other tiger economies had amassed large foreign debt and there was fear of worldwide contagion. That the crisis was contained and didn’t bring down the United States has been ascribed to the International Monetary Fund and the skills of then Fed Chairman Alan (“70 Percent Right”) Greenspan and then Treasury Secretary Robert (“Even I Don’t Understand These Derivative Thingies”) Rubin. But another critical difference: American banks were very different then: smaller, protected by Glass-Steagall, relatively well regulated, with a much smaller derivative market and shadow banking syndicate.
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