I am so confused. When it comes to financial reporting it is as if a foreign language were being spoken. I hear the VIX is up and the market is down. (I didn't even know what a VIX was until six months ago.) I hear that China is experiencing tremendous growth on the backs of the Western countries, then I hear China is on the verge of a recession, which could spark a revolution. Television channels report hourly and newspapers daily about the dim prospects for the Euro currency but few if any provide perspective on those reports.
I am a normally intelligent college graduate. But like most of us, I won't understand what is going on with the financial health of our country and the world until the present crisis is well past. Three years from now, Michael Lewis will write a book explaining what happened. Thanks Mike, but what should I do to protect myself and my family until then?
I have spent most of my career writing about technology -- first microelectronics, software, photonics and other high-tech stuff. For the last seven years I have been writing about biotechnology, medical devices and healthcare issues. Not simple stuff. I spend an hour to an hour and a half reading newspapers every morning, but when I talk to someone in finance, the answer is in financial gobbledygook that is overwhelmingly difficult to penetrate.
A few days ago, I asked a colleague why I should worry about the fate of the euro. He looked at me soberly and said in a sonorous voice, "contraparty." I wondered what the heck he was talking about. Was his answer a parody of The Graduate? Was his intoning of "contraparty" a reprise of "plastics?"
What I have gleaned thus far is that banks lent money to European investors and countries that the borrowers couldn't repay, just as the banks did with mortgages in the U.S. Usually, loans to a country (sovereign debts) are pretty solid because countries just print up the money to pay back the lenders. But European Union countries don't have their own money; they have the euro, the printing of which is out of their hands.
If the borrowers can't generate enough euros to repay the loans through commerce or additional borrowing, they default and the lenders are out a big chunk of money because how can you foreclose on a country? Enough defaults and the banks are in trouble. But the situation is worse than that. To protect themselves, banks have taken insurance on the loans, so that if the lenders fail to pay, the insurers (other banks, hedge funds and other investors) are in deep doo doo too.
If the debtor countries fail to pay, the whole house of cards collapses and the U.S. is sure to be drawn under, like a someone too close to a large ship when it goes down. But the European Central Bank is setting aside money to guarantee the sovereign debts and it seems that weekly, there is another revelation of more money that is needed to pay the loans. But the Germans and French are getting fed up with bailing out other countries, so there is the prospect of the European Union dissolving and the euro disappearing as a currency.
If the union decided to disband, they could either do a flash cut or have a transition period. If they disbanded in a flash cut, there would be chaos. The euro would no longer be a valid currency. Anyone with euros in their pocket or bank account would own worthless pieces of paper. Since the European countries gave up their printing presses, there would be no currency to immediately replace the euro and the result would be chaos.
If the union were disbanded over time, say six months to allow a smooth transition, then once again, the euro would immediately lose its value with no currency to replace it. Chaos again. Now I think I know why gold has been going crazy on world markets - from around $800 an ounce a year ago to as much as $1,800 an ounce now. But, I just read an article that said gold is going up because the dollar is going down. But the Europeans are guaranteeing loans by making dollars available. If the dollar is so worthless then why are they using it as a guarantee?
Like most people, I know I fail to understand the consequential elements of the current crisis. I am even uncertain that I understand the inconsequentials. It isn't that no one cares. Most people I know are concerned about our economic future, but we can't get a straight answer. We receive little or no guidance from media gurus who are supposed to be the experts, which only leads me to believe they are either unwilling to cause alarm or don't understand what is happening themselves. Whether it is Krugman or Cramer, someone out there must understand what is going on.
Financial reporting takes on the believability of Sergeant Bilko. CNBC is supposed to be a financial news network -- no help, just a parade of guest financial analysts pushing their favorite stocks. Bloomberg drones on but gives no insight.
The all-news channels are just as bad. Fox News, CNN and MSNBC are more interested in the Republican presidential horse race than explaining finance. Where is Edward R. Murrow when we need him? I would even settle for a reporter taking a trip to Brussels to show us the scene of the disaster as Walter Cronkite did when he went to Vietnam to report that disaster firsthand.
In an article that first appeared in Politico, Representative Collin Peterson (D-Minn) wrote about "the bet at the heart of MF Global's failure -- a repo-to-maturity on European debt." What the hell is THAT? And he is the ranking member of the Congressional Committee interrogating Jon Corzine! He obviously isn't speaking to the people who elected him.
When circumstances become so obscure that ordinary people cannot understand them, then people become fearful and act irrationally. When people act irrationally, democracy is threatened, panic ensues, orderly society is endangered. Unless our institutions take on the education of our people so our country and its leaders can be empowered to make rational choices, we will be in ever greater danger. Politicians and the press have the responsibility to provide that information. Instead we are consumed with platitudes and popularity contests. Meanwhile, to quote from that great philosophical source, the movie The Fly: "Be afraid. Be very afraid!"
About This Guest Blogger
Henry Bassman has lived in Summit, NJ for 37 years. He has been married for more than 40 years and has three daughters who graduated from Summit High School. Henry retired from AT&T where he wrote about high-technology science and engineering. He now writes about biotechnology, medical devices and healthcare companies and issues. Articles by Henry can be seen on ABCNews.com and other business Web sites.
Henry is the managing partner of Communications Plus Consulting, which has provided communications and advisory services about high-tech and biotech products and services for more than a decade. Other columns that he has written can be seen at http://thealternativepress.com/columns/uncommon-sense/articles