This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Greek Euro Exit? More Pain Than Gain

There are also tens of billions of dollars of Credit Default Swaps (CDS) outstanding on Greek sovereign debt. Regulators failed to deal with the capital issue in the CDS marketplace in the aftermath of the 2008-2009 AIG meltdown, so it is impossible to predict the effects of a Greek default on this marketplace because there is no information on CDS counterparties and their capital positions. But we suspect these markets, being unregulated, continue to be over-levered.

"Extend and Pretend" Causes Stagnation

The interconnected nature of today's global financial system implies that many other banks around the world face asset impairments and a need for more capital. Many banks could fail.

The stockholders and bondholders of these institutions should suffer losses, and not be recipients of the "moral hazard" of government protection. There will be terrible short-term pain. But, history shows that the pain of balance sheet depressions, while severe, is short-lived. The system returns to health with huge lessons learned about risk.

"Extend and pretend" only imposes a long-term period of economic stagnation as the cancers on bank balance sheets fester. Japan's is a 20-year example of the impact of unrecognized bank losses on the economy. In an interview given to Investors Business Daily ("Slow Growth Normal For Post-Fin'l Crisis Recoveries," Norm Alster, May 23, 2010) by Vincent Reinhart regarding the paper he recently wrote with his wife, Carmen, concerning the aftermath of 18 financial crises (see After the Fall, Aug. 17, 2010), in Japan, "the banks were allowed to carry bad assets on their books at inflated values." As a result, "property prices have declined for 20 years."

As an overview, Reinhart concluded that "the government's willingness to let banks carry bad debt rather than force them to take losses tends to stretch out the process of deleveraging. When you let banks carry their assets at high values relative to their market values, it freezes that market." His prescription: "Recognize the losses ... take the hit." Since it appears that the inability to restart America's economic engine is partly due to bank balance sheet impairment, why is Europe about to go down the same road?

Readers Also Like:


This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs