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Caldwell: All those fingers in the pie left a financial mess

Sun., April 17, 2011

Brian “Duff” Bergquist was not aboard what he calls the Financial Crisis Express, but he was on the platform as the train approached.

Now executive-in-residence at Whitworth University, Bergquist was an equities trader in Germany and Great Britain for Goldman Sachs, Credit Suisse-First Boston, Morgan Stanley and Lehman Brothers – the locomotives that wrecked the global economy when the express left the tracks in 2008.

Equities were not the driver. Bonds and the ever more exotic debt instruments underpinned by inflated real estate values did the damage.

Although Europeans blame Americans for inflating the housing bubble, Bergquist says folks on the Continent were pumping as hard as we were. Governments borrowed with the expectation revenues would continue rising, individuals bet on the non-stop appreciation of their homes.

“A lot of people had their fingers in the pie,” Bergquist says.

When the collapse of Lehman finally brought the house down, foreign banks were among the biggest borrowers from the Federal Reserve, which was doing all it could to keep credit moving. At the peak of the crisis, 70 percent of the $110 billion lent in one October week went to foreign banks.

Bergquist hangs blame for the mess on everyone from borrowers who lied about their incomes to bankers who concocted the credit-default swaps and other flim-flam foisted on gullible investors. Rating agencies like Moody’s and Standard & Poor’s, which bestowed AAA rating on the funny paper, vastly expanded the pool of fools, he says.

There was a whole lot of appetite for rewards, and not much thought given to risk, he says.

Now, the reckoning has come, with bitter consequences for the PIGS: Portugal, Ireland, Greece and Spain. Bergquist adds a second “I,” for Iceland.

No longer able to roll over their debt, they are seeking help from the International Monetary Fund and other sources. Lenders, in return, are demanding painful austerity measures from those governments. Demonstrations by unhappy pensioners, public employees and students have become violent.

And reduced government spending, however admirable, can be a drag on economic growth.

Bergquist says the United States, with its freedom to inflate the dollar, has so far avoided the hard choices. The just-passed 2011 budget has only token cuts. The looming debates on the 2012 version and increase in the federal debt ceiling will have Americans looking down the same track Europeans already are traveling, he says.

“Somebody has to pay,” he says.

Bergquist says he is no fan of taxes but believes more revenues must be one of the elements of a fiscal repair plan. Growth alone will not bring the U.S. back from the fiscal edge.

Sacred cows will have to bleed some.

“Europe is telling you the population doesn’t like it,” he says.

Individuals are going to have to sacrifice some indulgences today to fund their own retirements, Bergquist says, adding “I don’t know if we’re there yet.”

His students probably are, or soon will be, especially those who borrowed heavily to pay for their education.

The financial crisis express was still rolling when today’s seniors enrolled. If they are very lucky, and the nation’s leadership can coalesce around a responsible budget, next fall’s freshman will arrive on the financial recovery trolley.

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