Look Out, World

The city is Athens, not Lexington or Sarajevo. But this shot, too, will be heard around the world. Prime Minister Papandreou has called for a referendum on the bailout.

It is too bad – but the bailout is too little, too late. When lenders get greedy and make dubious loans because they pay 8% or 11% there is an obvious risk, and the risk is the lender's. Germany, France, and the European banks have been slow to recognize this.

The 50% haircut in this deal is a good start. But the deal burdens the Greeks with further austerity measures. Papandreou has seen what Merkel and Sarkozy have not: that an economy is not about money – rather it uses money as a means of exchange. Instead it is about the shared destiny of its people, and citizens have a say in the political process.

True, the Greek economy was and is corrupt. True, a large portion of it was under the table. The Greeks will have to work all that out.

But the world is going to be working out something else: that making high-risk loans can result in a 100% haircut. That privatizing profits and socializing risks is a shell game that can't last. That fancy financial products like Credit Default Swaps are dishonourable and lead to ruin.

Look out, world. We have been living in a fool's paradise. Reality is about to hit the fan.

Finance is Simple

document.write(" serif;">Money makes money. Money in motion makes more money. Money in the mattress molds.

If you have money, you lend it so it will work and make money for you, or you buy something. Either way you take a risk. When you invest your money you balance risk against return.

That’s it. It's not rocket science.

The Street will cry in outrage, and some will be sincere. But the truth is finance is complex only in invention and obfuscation.

All “financial instruments” are a combination of buying something or lending your money. If you lend the money you expect the principal to be protected and the interest to be paid as per the contract. If you buy something you want to enjoy it or watch it appreciate – perhaps both.

But there is always a risk. Your investment can be guaranteed or insured or blue chip. It can be conservative or rock solid. That changes nothing except the odds.

We are hopeful and therein gullible. If we are offered a “financial product” we would prefer to believe that the contract conditions (that 8% interest rate, for example) are guaranteed (or one of the other adjectives above). The reality is anything can happen. Ask the states and municipalities and pension funds about their mortgage-backed securities.

Investment banks and private equity funds and hedge funds have always been about making money for number one. Since September 15, 2008, when the Lehman Brothers bankruptcy ushered in the current downturn, the line between these institutions and regular banks and money managers has blurred. It is time we made our own risk assessments.