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Innovation/Global Crisis Blog

The Real Reason Behind the Euro Crisis

By Shlomo Maital  

  In a speech last week, the powerful CEO of Deutsche Bank, Josef Ackermann, let the ‘risk’ cat out of the ‘euro’ bag.   It turns out that European banks, in Germany, UK and France, hold huge amounts of bonds whose value has plummeted because the PIIGS (Portugal, Ireland, Italy, Greece, Spain) governments may be unable to redeem them.  But unlike in the U.S., where commercial banks have ‘marked to market’ similar assets (bonds backed by sub-prime mortgages),  European banks have been slow to recognize these losses and regulators have been super-delicate in requiring them to do so.   European bank balance sheets do not reveal even a fraction of these losses. 

    “Many European banks would not be able to handle writing down the sovereign bonds they hold on their banking books to market levels”, Ackermann said.   What he means is that Europe has been playing a game of deception,  trying hard to ignore bank losses and hoping somehow they will go away.  But they won’t. 

     Of course, capital market insiders know this and have known it for years.  Deutsche Bank shares lost a third of their value this year, and less than half of their price before the Lehman failure in Sept. 2008.  Some 29 of 30 leading European banks, according to NYT reporter Floyd Norris, have share prices lower today than on the eve of the Lehman Bros. collapse.  Credit Suisse, Lloyds, Societe Generale, and UniCredit have lost 40 per cent of their share value since Jan. 1.   These losses, in turn, act as dominos, threatening financial institutions in other countries, including in Israel, where a leading tycoon invested heavily in Credit Suisse shares and has now suffered massive losses. 

     And here is the weird irony.  Governments everywhere bailed banks out in 2008.  To do this they incurred debt.  This debt now has become burdensome and some governments cannot pay it.  But many of the banks governments bailed out hold this debt, and now, again, the banks are threatened by the very governments who tried to save them. 

     There is no obvious solution.  IMF Head Christiane Lagarde wants banks to raise more capital.  Ackermann says this will cause bank shares to fall even further, because it will threaten to dilute the holdings of existing shareholders. 

      Europe must learn from America. The U.S. is unparalleled at creating financial crises, but is also terrific in how it cleans up the mess by writing off losses quickly and starting fresh.  Europe does the opposite, sweeping losses under the carpet and then moving a sofa to hide them.  It won’t work.  Look for continued euro crises, which impact the whole world, until Europe wakes up and tells the truth.


Innovation/Global Crisis Blog

How eBooks were Invented, and How Michael Hart Changed the World

By Shlomo Maital

 Michael Hart


  The person who invented e-Books died last week, at the age of 64.  His name is Michael Hart, and his little-known story shows how one person with one idea can truly change the world. *

   Hart was a student at Univ. of Illinois.  (Recall that this university was a major pioneer in computer science, thanks to Marc Andreesson, who thought up Mosaic while at U of Illinois, Mosaic later became Netscape, the Internet browser).  He was given a user’s account on a Xerox Sigma V mainframe computer in the school’s Materials Research lab in 1971, an account worth, according to him, $100 m. at the time.  He tried to think up a project that would justify the cost, even though it was free for him.  On July 4, 1971, he attended an Independence Day fireworks celebration and later stopped at a grocery store. With his purchases, he received a copy of the Declaration of Independence.  Hart typed the document and intended to send it as an email to all the users of ARPANET (the precursor of the World Wide Web).  But a colleague said this would crash the system! (The whole Declaration is only 1,357 words!).  So instead, he posted a notice saying the text could be downloaded.  Hart said he wanted to “encourage the creation and distribution of e-books” in order “to help break down the bars of ignorance and illiteracy.”. 

   Hart’s initiative and modest idea gave birth to Project Gutenberg, which today lists more than 30,000 downloadable e-Books in 60 languages.    The Project got off to a slow start.  Hart created only 313 e-books by 1997.  But by 2021, Project Gutenberg’s 50th anniversary, it is predicted there will be a billion e-Books available – and, said Hart in an email,  “you will be able to carry them all in one hand!”. 

Hart once told a magazine called Searcher: “I was just waiting for the world to realize I’d knocked it over. You’ve heard of cow-tipping?  The cow had been tipped over, but it took 17 years for it to wake up and say, ‘Moo’. “

    Rest in peace, Michael Hart.  You’ve showed us how an idea and a very tiny initial proof-of-concept can snowball into a change-the-world industry.  And best of all, you lived to see it happen. 

  •  “Michael Hart, 64, pioneer in e-book distribution”, by William Grimes, Global NYT Sat-Sunday Sept. 10-11, 2011.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2011
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