If you read or watch the news much, you’ve seen news reports about problems with Greece’s economy and its debt. Greece can’t pay back its lenders, and somehow that’s a disaster for the world’s economy. But Greece is a small country, right? How can its problems possibly bring down the whole of Europe and threaten the US economy, too?

Welcome to a world of massively increased bank profits based on hugely magnified risk.

Greece’s debts are not terribly big; for example, French and German banks (its biggest lenders) hold about $90 billion in Greek debt. That’s less than the US spent on the war in Afghanistan last year. For a small country that’s a lot of money, but for the global financial system, it’s peanuts.

So why can’t European banks restructure the debt and give Greece more time to pay off its loans? Answer: healthy banks could do this, but European banks are not healthy. They lack the capital to cover the lost income from Greece’s regular debt payments. European banks are structured the same way US banks are: loans have been used as capital to support making further loans. In accounting terms, banks have treated their loans as tangible assets instead of the intangible assets that they truly are.

That’s common practice in the worldwide banking industry, and most of the negotiation over new reform rules for banks is about what banks should consider “capital” and how much capital banks should have on their books vs. how much money they can lend out. Regulators want banks to stop considering loans as capital, and they think banks should hold more cash as capital. The strictest regulators want banks to hold 14 percent of all their assets in cash (capital) to offset losses on loans. The banks are holding out for 7 percent or less, and are arguing about what should be considered “capital.”

Why are the banks fighting against a regulation that would help to stabilize the banking industry and avoid a situation where the collapse of a small country’s economy could threaten the health of their entire industry? Answer: profits.

The more loans a bank can make, the more income it generates. Requiring banks to sit on piles of cash and stop using loans as capital would severely cut down on the amount of loans banks can make, thereby reducing the banks’ income. Huge bank profits mean huge bonuses for bankers and big profits for shareholders. Financial industry stocks have driven much of the growth on Wall Street in the past 15 years.

Okay, so French and German banks would be in trouble. Big deal, right? Why should the US and other countries care about a few foreign banks? If they fold, then that means more business for our banks, right? Wrong. The global financial industry is interconnected. One bank failure can lead to massive problems for all other banks. Think back a few years ago to the collapse of Lehman Brothers, and you’ll get an idea of what I’m talking about. The collapse of one bank sent a shockwave through the worldwide banking sector. It led to the near demise of AIG and forced the merger of several large US banks in order to avoid another Lehman Brothers. The US Treasury and the Federal Reserve poured hundreds of billions of dollars into the banking system both in the US and abroad; in fact, the Federal Reserve loaned more money through its discount window to foreign banks than it did to US banks.

But haven’t things changed since then? Well, no. If anything, things are more precarious now. The big banks are even bigger, having swallowed up several of their large competitors and many mid-size banks, too (and taken on bigger debt loads in the process). The Dodd/Frank bill that was supposed to bring real reform to Wall Street contained only a vague restructuring of the regulatory agencies, while leaving the details of new reforms to those agencies to work out. Wall Street and the Republicans in Congress have fought against every change that the regulatory agencies have tried to make, and been extremely successful at stopping any meaningful reforms.

As a consequence, US exposure to Greece’s debt problems may be higher than anyone knows. The US market for derivatives is probably the largest in the world, although no one knows for sure because derivatives are still the unregulated Wild West of the financial world–traded privately, with no reporting to the SEC. In the year since Greece’s troubles first came to light, European banks have probably purchased huge numbers of credit default swaps to insure their investments in Greek debt. In other words, if Greece defaults, US banks may have to make payments on those credit default swaps to European banks. This is what brought AIG to the brink and, while Greece is not as big a problem as the AIG mess was, nobody really knows how big a mess it is, and that’s enough to scare everybody.

Credit default swaps are another risky way that banks boost their profits. But US banks aren’t the only ones with exposure to Greece. US money market funds buy a lot of short-term debt of other financial industry players, and foreign bank debt is particularly popular. Spooked by the 2008 collapse on Wall Street, many investors are keeping their savings in money market funds, which in turn have to hunt for enough short-term debt to buy to ensure a small income for investors. It’s not clear that these funds could sell off their European bank debt even if they wanted to. With record cash inflows and investors demanding safe and steady returns, and with an economic downturn that’s stifled public works projects around the world, where else could money market funds go to buy “safe” debt?

So the pressure on the Greek government is enormous. Twenty or thirty years ago it would have been routine for lenders to refinance or restructure a nation’s debt, as so many developing countries did during the 1980’s and 1990’s. But now the only solution is to force the Greek populace to absorb tax increases, job cuts, wage cuts, cuts in social services, and a sell-off of public assets. These austerity measures were used in the 1980’s and 1990’s, too, but never during a worldwide recession and under conditions that make it impossible for Greece to increase exports to help stimulate it moribund economy.

The global banking industry, because if its own greed, now has to squeeze blood from a stone. From here on, the choices are simple, but stark: Greece will either become the poorest nation in Europe, destabilized by riots and a crippling collapse of its economy, or the banks will have to restructure Greece’s debt. If the banks give in, then maybe the financial ripples will be small. But don’t bet on it, because Greece is not alone: Ireland, Iceland, Portugal, Spain, and even Italy are also in trouble because of their debts.

So things are not looking good for Greece. Unfortunately, the political and social turmoil there may get a whole lot worse. Political leaders may find out that allowing banks to operate without any oversight can lead to severe political repercussions, ones they never expected.

No more empty Metro buses running to the ‘burbs! Metro may end the 40/40/20 rule.

The King County Council’s transportation committee voted last week to change the way Metro allocates bus service. In the past, Metro used a 40/40/20 ratio to allocate new bus service: 40% would go to south county routes, 40% would go to east county routes, and the remaining 20% would go to routes inside the city of Seattle (even though the vast majority of bus riders live inside the city). The 40/40/20 rule was a compromise with the conservative members of the county council who didn’t want to fund new bus service unless their constituents in the suburbs and rural areas of the county got the majority of new routes.

But in the last two years, as Metro has struggled to provide funding for basic bus service in the face of an economic downturn, the 40/40/20 rule has proven to be a huge liability and a system-breaker. Last year Metro had to balance its budget by cutting 75,000 hours of service. The cuts were spread evenly across the system, based not on ridership or demand, but on the service hours on each route. The in-city routes, which had received only 20% of new service hours in the past decade, were forced to take 60% of all the cuts last year, leaving a lot of Seattleites and north-county riders standing at their stops while full buses passed them by.

Last year, an advisory group recommended that Metro transit do away with the 40/40/20 rule. The county council is finally on the way to making that a reality. The full council will vote on new allocation criteria within the next few weeks. Under the proposed new rules, service levels will be based on the number of households on each route, the number of jobs in a given area, the number of low-income households on each route (as lower income folks tend to use the bus more than wealthy folks do), and the location of natural “growth hubs” (for example, major employers, like Microsoft or the University of Washington, or major retail areas, like the Northgate Mall, Bellevue Square, or Southcenter.)

Under the new rules, Metro expects that only 1% of its bus service will shift to in-city routes, which doesn’t match the expectations of most in-city riders I’ve talked to. Nor is it a cure for Metro’s worst problems: its growing budget shortfalls and its worsening on-time record.

Crowded buses are one thing. Buses that run chronically late (when they bother to show up at all) is another. Metro’s on-time record for its in-city routes has become abysmal. There is no excuse for making passengers stand for more than half an hour in the downtown bus tunnel at 7 pm waiting for a bus to the University District; yet this is becoming a common occurrence—and these are the most frequently travelled routes in the entire system. It’s also common to stand in the bus tunnel for long periods of time (20 to 40 minutes) with no buses arriving at all, but plenty of empty light-rail trains at seven minute intervals.

Even worse are the drivers who are routinely early and who suffer no consequences for it. I recently flagged down a #67 bus that was speeding by a stop a full ten minutes early. The driver shrugged his shoulders and said: “those times are just estimates.” Well, no. They’re not, at least not for the rider. We expect the bus to be on-time when we’re standing outside in the rain in 40-degree weather. Ten minutes late is okay, but ten minutes early? Never!

The main cause of Metro’s on-time problem is simple: Metro recently shortened drivers’ layover times at the end of each route. Now drivers have every incentive to zoom through their routes early; otherwise, they barely get a bathroom break before they have to begin their next route. This is a prescription for a chronic on-time problem. Extending driver’s break times, of course, would cost money which Metro doesn’t have.

The King County Council is currently looking at a proposal for a $20 car tab fee to fund Metro transit. But for the proposal to pass the council, it would need a supermajority of 6 out of 9 council members to vote for it. Four of the most conservative council members have already said they’ll vote it down. Alternatively, the council could vote with a simple majority (5 to 4) to put the tab fee on the ballot for voters to decide in November. They should do this as soon as possible, so transit advocates have time to gear up a campaign in support of the ballot measure.

Without that funding, Metro will have to cut 200,000 service hours next year in order to plug the hole in its budget. The bus system is already in trouble; a cut of 200,000 hours could cause one of the nation’s largest and most reliable transit systems to collapse.