The Guest Blog

Farr: 100,000 Protestors, a Warning for the US

As I write, violence is breaking out in Greek streets with rocks and fire bombs being hurled at police. One protestor caught fire in the last hour. Thousands of government workers, including teachers, sanitation workers, and prison guards, are striking, causing school closures, prison riots and sanitation crises. Greek officials state that the government will be completely out of funds by mid-November, requiring an immediate infusion of 8 billion Euros.

There is a desperate human story beneath the headlines. Time World reports: Trifona, a 59 year old housewife, stopped believing that the austerity measures were going to lead anywhere good. A few months ago, her husband, a retired schoolteacher, saw his pension cut by a third. Then the restaurant they ran in Crete failed. Now they can no longer pay their mortgage. She's afraid she and her husband are going to be homeless. The crowd yelled at the police, who doused them with tear gas again. Trifona covered her face with the sleeve of her cardigan. "Shame on you," she coughed at a young officer. "We're running out of hope. Can't you see?"

I wrote about the arrogance of overspending accompanied by its close cousin entitlement in an Op Ed just published in Politico. As the human tragedy continues to play out, we see three thorny problems with Greece:

1) Even if they get additional funds, Greece’s ongoing tax revenues will remain well below their expenditures, so they will continue to need more;

2) The European banking system is holding loads of bonds issued by Greece and other troubled European sovereigns; losses on these bonds could create sizable capital deficiencies at individual banks as well as the system at large; and

3) The rescue fund known as the ESFS, European Financial Stability Facility, will rest mostly on the shoulders of France and Germany. Ultimately, German and French taxpayers may be on the hook for losses sustained on Greek bonds. This morning Germany reduced its own estimates for GDP growth in 2012 to less than 1 percent. The fragility of the inter-connected, inter-dependent global economy is vivid.

A senior official at the FDIC recently told me they had no idea as to the magnitude of US banks’ exposure to Greece, Ireland, Spain, Portugal, and Italy. He allowed that they were reading estimates from various sources but were unable to get a clear picture. The lack of clarity can be attributed to our old friends, the Credit Default Swaps . Unraveling the various direct exposures, offsetting hedge positions, and counterparty risks is simply an impossible task.

Like their Greek counterparts, protesters in the US have found numerous reasons for complaint — from the sheer effrontery and occasional lawlessness in our leaders’ behavior to the debilitating toll suffered by the majority of Americans because of the greed and excess of the arrogant few.

There is undoubtedly justification for the outrage. Greedy, arrogant behavior has directly caused much of the pain we are enduring in the wake of the worst financial crisis since the Great Depression. However, arrogance and financial irresponsibility were not confined to a few powerful bankers and corporate CEOs. Recklessness and arrogance were so pervasive as to become defining characteristics for our country as a whole. We simply went on a credit-induced spending splurge, while sticking our hands into the pockets of future generations of Americans.

As we try to dig ourselves out of crisis, whether US continues to spend more than it brings in. All of that excess spending keeps increasing the national debt. It has to stop. I don’t think Greece will happen here, but Greece didn’t expect it would happen to them either. My new book The Arrogance Cycleshows there are always warning signs. They question is will we heed them?

Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C.  Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.