Wall Street Buried by Eurozone Debt

by John M. Curtis
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Copyright September 26, 2011
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           Wall Street’s irresistible force was hit by the Eurozone’s immovable object in the name of the euro—the once vaunted currency that was supposed to make Europe prosper like no other time in history.  Twelve years into the common currency, Europe’s disparate economies teeter on bankruptcy, with Greece the most egregious case of the euro’s failure.  Based largely on the powerful Deutsche mark, the euro maintained parity with the dollar for a brief time in 1999 before taking off like a rocket when currency traders went wild bidding up its value.  When the dust settled, the euro was so hyper-valued, only Germany, France, Belgium and Netherlands, could keep pace with a too costly currency in Europe’s more modest industrial states.  It didn’t take long for less export-minded countries to run out of cash and forced to beg, borrow and steal more euros from Frankfurt-based European Central Bank.

            Furious attempts by the European Union to paint a rosy picture over mushrooming debt and prospects of default by some of Europe’s most respected economies won’t go away overnight.  Wall Street wants the Eurozone debt crisis to disappear but fiscal realities related to the common currency create an untenable problem for the majority of Eurozone countries. “Everyone had come to the conclusion that tit was spinning out of control, and no there is some talk of actually beefing things up,” said Stephen Massocca, managing director of San Francisco-based Wedbush Morgan.  While the Dow Jones Industrials showed some life today after a furious sell off last week, hedge and private equity funds created a “dead cat’s bounce.”  Eurozone leaders are far from any kind of solution to the spiraling debt problem that has left Europe’s biggest banks emptied of cash.

            Profit taking or buying frenzies in the U.S. stock market say little about systemic problems in Europe.  Europe’s sovereign debt problems stem more than from a global slowdown started in 2008 when U.S. banks ran out of cash.  Europe’s problems started when the EU hatched the idea of a common currency, promising more economic cooperation and prosperity.  Countries, like Greece, whose drachma was a tiny fraction of the Deutsche mark, couldn’t fund its government and social welfare programs with a transition to euros.  There simply weren’t enough euros.  Other countries like Italy, Spain, Portugal and Ireland also found the transition to euros economically stifling.  Other than Germany and France, transition to euros provided to little cash to fund government and social welfare programs.  So whatever the EU does to contain a growing PR crisis, real problems persist.

            Across the pond in the U.S., Wall Street finds itself dogged by more than the Eurozone debt problems.  Commerce Department reported that new home sales slipped in August by 2.3%, a clear sign that the economy is stagnating.  White House officials don’t seem to get that they can’t fix the economy with more bailouts only.  While there’s nothing wrong with funding public works jobs, President Barack Obama must do more to address real flaws that prevent the economy from growing.  If the housing sector continues to decline, it reflects stagnant growth, but, more importantly, cash flow problems for consumers.  Treasury Secretary Tim Geithner must work closely with Fed Chairman Ben S. Bernake and heads of Fannie Mae and Freddie Mac to set appropriate lending standards.  New guidelines stemming from the 2008 banking crisis prevent qualified borrowers from getting loans.

            Economic recovery is tied to many factors, not least of which is expanding the nation’s jobs market.  Generating more private sector jobs is the single most responsibility of the president and Congress.  Apart from Party differences, both agree that expanding private sector jobs is key to reducing deficits and stimulating economic growth.  President Obama must be more forceful in encouraging companies to manufacture or assemble here in the States.  What’s already happened in the auto industry must happen in consumer electronics and appliances.  Whether brands are domestic or foreign, American consumers are happy to buy products built in America.  Manufacturing or assembling in the States would go a long way in generating the kind of obs needed to expand the workforce.  Bailouts only create dead-end public works jobs, not lasting private sector employment.

            Keeping Wall Street advancing requires the Treasury and the Fed to address basic problems in today’s economic environment.  As long as public officials default on regulating hedge and private equity funds, short sellers will dominate markets, preventing the kind of growth needed by corporate America.  More work is needed to correct the overly restrictive lending standards that have prevented many qualified consumers from getting into the housing market.  Minor adjustments to lending standards would qualify millions more borrowers for home ownership.  When more qualify for loans, the Commerce Department should see a spike in new and existing home sales.  More homeownership eventually translates into more consumer spending, improving the nation’s Gross Domestic Product.  Whatever happens to the euro, the U.S. must focus on fixing its own economy.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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