Shun the Snake Oil
In the famous word of Red Foxx, it looks like "this is the big one" for the European Union. The EU looks to be collapsing. Listen carefully and one can almost make out faint screams of "look out below!"
Anyone who has been paying attention the last several weeks has seen Greece coming closer and closer to its now-inevitable default. Despite numerous bailout packages from more wealthy/fortunate countries (read: countries with no-nonsense leadership), this liberal country by the sea has refused to make a stand against its public- and private-sector unions and make substantial necessary changes to its monetary policy.
When Greece defaults - and it WILL default - there's little telling what other dominoes might fall as well. Italy, Portugal, and Spain are all in the general vicinity of the chopping block, with much of their debt commingled with the Greeks, so it's no stretch of the imagination that some combination of those countries may follow suit with defaults of their own.
After all is said and done, the likelihood that the European Common Market will still be intact is relatively low and falling every week. Why this comes as a surprise is beyond us; considering the EU is only twenty years old and had never faced any real obstacles in the form of recessions or financial crises until just three years ago.
This raises an important point: the leaders of the EU - the academics who devised it and the politicians trying desperately to hold it together - are flying blind through this storm.
The idea of a European Common Market was put forth by academics and administrators who espoused (and still support) complex economic theory, the "smartest guys in the room," as they like to be called. When they originally pushed the idea, they spoke in complex economic terms which served little purpose other than confuse those around them, convincing others of their "smartest guys in the room" status.
Unfortunately, as we've seen repeated throughout history time and again, they weren't the "smartest guys in the room." The same was true of the fellows running Long-Term Capital Management, Bear Stearns, Lehman Brothers, along with Russia when it defaulted some years ago, as did Mexico and Argentina.
Lest we forget Barack Obama, Ben Bernanke, Tim Geithner or his predecessor Hank Paulson, all of whom thought themselves ready to steer the economy of the largest free-market superpower in the world; and none of whom have proven effective leaders.
This isn't strictly an indictment of politicians. Many so-called professionals in the finance industry are just as guilty of overreaching their own intelligence. For decades portfolio engineers and so-called advisors have invented "new and improved" investment strategies that are usually designed to do little more than separate an investor from his or her money.
Be they derivatives that included toxic mortgage-backed securities that almost brought down the US financial system in its entirety, Portfolio insurance popularized in the 1980s, or Bernie Madoff's 'proprietary' trading system, complex solutions rarely solve simple problems. In most cases, a huge amount of time is spent convincing clients of potential gains, but little heed is paid to potential holes that expose clients to downside risk.
The lesson in all this is simple: Beware those who pretend they're smarter than you. In the long run, most will prove to be little more than charlatans peddling snake oil.