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Alex Petralia

The United States of Europe through the Treasury of Europe

As the European sovereign debt crisis unfolds, all eyes are on Germany. Should Germany not guarantee the sovereign debt of its Eurozone counterparts, national governments will be forced to default.A German refusal to backstop the Euro will cause bondholders to lose all confidence in the ability of national governments to repay debts without external support. Bondholders will stop lending and in turn, governments will not have enough money to repay their existing debt. Governments will default and some will exit the Euro. Creditor banks will take substantial losses on their balance sheets; many will go bankrupt. Credit flows will freeze in the Eurozone and global demand will weaken—a precursor to years of economic malaise. Like a nightmare that does not seem to end, yet another financial meltdown seems troublingly imminent.Economically, the solution is fairly straightforward. Except for Greece, high interest rates alone are crippling previously stable economies like Spain and Italy. Germany, along with other Eurozone members, must simply guarantee the debt of troubled nations through the European Central Bank (ECB) or European Financial Stability Facility (EFSF) in order to restore short-term investor confidence. Interest rates will fall in the short-term, debt service costs will decrease, and governments will be able to repay their debts in a more tranquil environment.Politically, though, the solution is far more complex. It is in this realm that we see arcane phrases like “fiscal austerity,” “transfer union” and “moral hazard.” In short, Germany does not want to guarantee a Eurozone member’s debt on general principle. These countries irresponsibly ran up excessive debt and must pay the price by imposing fiscal austerity—that is, cutting social programs and raising taxes. Germany maintains that the European Union is not a transfer union: if one country is doing poorly, it is not the duty of another to help. Finally,… Read More

As Banker Pay Declines, the Faustian Bargain Loses its Appeal

Aspiring investment bankers have long recognized the proverbial Faustian bargain of their prospective careers. In exchange for extravagant lifestyles and immeasurable wealth, they must first sacrifice their souls—that is, their social lives, relationships, health, and recently, their sense of morality. It’s a tough decision, but investment banking does have its takers.It wasn’t always this way. After Franklin D. Roosevelt's New Deal, the profession was largely subdued by stringent regulation. Establishment of the SEC, fixed commissions for brokerage firms, the Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956 all worked to limit the size, leverage and risk of banks. Once upon a time, banks didn't trade on their own account or sell complex financial products. Bank profits were—well, normal. As a result, banker compensation was roughly identical to that of other private sector jobs.By the 1980s, things had changed. A sluggish economy triggered complaints of overregulation and excessive bureaucracy. President Reagan responded with a wave of deregulation, allowing banks to compete for commissions, conduct proprietary trading, structure sophisticated financial products and absorb smaller banks. Bank profits skyrocketed. Adjusted for inflation, returns in the financial sector grew 800% from 1980 to 2005, compared to a paltry 250% by nonfinancial sectors. In 2007, the average banker salary of $100,000 was twice that of the private sector.            Investment banking had become the new “get-rich-quick” scheme. Bonuses in the millions were not uncommon. Banking was competitive, exhilarating, cutthroat and—of course—immensely lucrative.The media only added fuel to the fire. In 1987, Oliver Stone’s Wall Street hit theatres, starring Michael Douglas as the infamous Gordon Gekko, a corporate raider and profiteer. Gekko’s memorable “Greed is good” speech, intended to portray the financier as avaricious and amoral, instead served as implicit justification for the entire industry.Michael Lewis’ Liar’s Poker followed in 1989, in which… Read More