Irish taxpayers are unhappy. Why? Because they’ve been told that they have to pay back investors who lent money to a bank called Anglo Irish, which went bust and was bought by the state last year.

The reason they’re upset is not just because it’s a lot of money - more than a billion euros, or because Ireland is in no shape to be paying vast amounts of money out to anyone. They’re upset because the investors were given no guarantee that they’d get their money back.

These investors lent money to the bank in the form of bonds. Bonds are usually pretty simple investments, and at their most basic, they come in two forms: secured and unsecured. 

Imagine your cousin Ricky comes to visit you one afternoon. He’s a bit strapped for cash, and he’s off to Vegas for a bachelor party. Can you lend him a thousand bucks? He’ll pay you back Money - honest!

You could, of course, kick cousin Ricky into the street, but assuming you want your cuz to have a good time at the tables, you have a couple of options. You could hand over the money and tell him you’ll see him on Monday. Or you could tell him to hand over his Rolex, and tell him that you’ll return it to him when he returns the money to you.

Which option makes you feel more secure about getting your money back?

If you took option number one, your loan to Ricky was unsecured. If Ricky loses everything, gets into a fight with a Russian mobster and leaves the country, you are out of luck. 

But if you opted to keep his Rolex, then you can sell the watch to get your money back. In other words, your loan to Ricky was secured.

If Ricky is really desperate for the cash, he might offer you an interest payment. Lend him the money, and he’ll give you back the grand plus two tickets to the Beatles Love at the Mirage! That’s what you get for taking the risk that you might not see Ricky or your money ever again.

But ask for his Rolex as security, and suddenly there’s a lot less risk involved. Now you’re just doing him a favor, which means the only compensation you’re gonna get is a few beers down at Clancy’s.

Ricky is just like any company - including Anglo Irish Bank - that issues bonds. The difference is that instead of expensive watches to back their secured debt, companies use stuff like real estate, or pools of mortgages, or all of their assets. If the company goes bust, the secured lenders share all that stuff between them. Because they’re likely to get some, if not all their money back, these secured investors only get paid a small rate of interest.

Unsecured lenders, on the other hand, get paid a lot more interest. Why? Because if the company goes bust, they only get the scraps that are left after the secured lenders have been paid. The only way these investors can get anything out of the company is to take legal action.

In short, secured lenders end up with collateral; unsecured lenders end up in court.

Here are two words we’ve been seeing a lot in the headlines recently. Private equity.

Private equity, or PE, as it likes to be known in the trade, doesn’t like being in the headlines. It’s been there before, back in the 80s, and it didn’t enjoy the experience. The press wasn’t exactly flattering. In fact the press was so bad that PE changed its name. PE It used to be called leveraged buyout, or LBO, but the LBO became tainted goods, and a makeover was required.

More about that later. Right now, PE’s in the news because of Mitt Romney, who used to work at a private equity company called Bain Capital, back in the 80s. That was back in the LBO days, when LBO shops were accused of being corporate raiders and asset strippers. Remember Gordon Gekko in the movie Wall Street? He was a private equity guy. And that “greed is good” speech? That’s the private equity hymn.

So what is private equity, actually? Well, if public equity means shares in public companies like GE and Google, then private equity means shares in private companies, like my uncle’s ice cream company. Or Facebook. Right?

Yes, but that’s not the whole story. When people talk about “private equity,” they’re usually referring to private equity funds, like Bain Capital or the Carlyle Group, rather than the shares those firms buy. You see, there are plenty of institutions that buy shares in private companies. Venture capital funds, for one. And hedge funds. What distinguishes private equity funds, is that they buy these shares in a particular way. In fact they buy entire companies using that technique I mentioned earlier, the infamous leveraged buyout.

An LBO looks pretty simple on the face of it. It’s really just the way a bunch of people get together and flip a company for a profit.

It’s rather like an episode of “Flip this House,” where a family clubs together to renovate a mansion in Malibu. Each member of the family chips in 100K each, so they have a down payment of a million bucks. Now they go to the bank and borrow $9 million. They buy the manse, sell off half the land around it, knock down the servants’ quarters and sack everyone but the butler. Then they put in wooden floors, granite countertops and a steel fridge and two years later, they sell the place for $20 mil. The bank gets its money back, and the family divides the $10 million or so that’s left. (They had to make interest payments on the debt, remember!)

Private equity funds do the same thing with companies. They get a bunch of investors together to pony up some cash - that’s the equity; then they go to the bank and borrow several times that initial amount - that’s the leverage; and then they acquire a target company - that’s the buyout. They then tweak the company with the aim of making it more profitable, so that they can sell it off in a few years for a profit. Pay back the loan and split the profits. It’s a bit like management consultancy on steroids.

And it’s not an other-worldly business. If you have a pension or a retirement account, your money is likely invested in LBO activity in one of two ways. Either your pension fund is an investor in the PE fund itself - and plenty are - or your pension fund has bought a slice of that bank debt. You think the bank holds that whole loan? No way. It slices the loan into little bits and sells it off to a range of other lenders from other banks to the Los Altos Fire and Police fund. That’s called syndication, if you’re interested.

Do private equity firms sack people? Yes they do. My Mum got the boot after ten years working at a company that was acquired by Clayton Dubilier & Rice back in the 90s.

Do PE firms create jobs? Yes they do. If the company becomes profitable, grows and hires more people. That’s what happened in the case of Clear Channel, HCA and the most storied LBO of all, RJR Nabisco.

But sometimes things don’t work out the way PE funds hope, and sometimes PE funds make mistakes. When that happens, everyone loses - the workers, the bankers the PE funds and the institutions that invest your retirement money in them. Which menas you lose, too.

But I guess that’s capitalism, baby.

If ever there was a word that you’d expect to find in a Harry Potter novel, it’s rehypothecation. This a classic example of financial people inventing impenetrable terminology to make their business look like a black art. “Oooh, re-hypothecation, it must be magic!”

Well it isn’t. To explain re-hypothecation, we have to explain hypothecation. And hypothecation is pretty simple. It’s when you lend someone money and let the borrower keep the collateral.

This is not an unusual thing. In fact, it’s entirely normal. If I borrow money from Billy the banker to buy a car, the car is the collateral for the loan. I can use the vehicle, but if I fail to make the interest payments, Billy will come and my T-bird away. Same goes for my house, if I borrow money to buy that, too. I take out a loan, but instead of giving the collateral for that loan to the lender, or placing it in escrow, I, the borrower, hold on to it. Hypothecation.

Interesting use of language here. When a borrower defaults on a car or home loan and a bank seizes the collateral, it’s called a repossession. RE-possession, implying that the bank assumed it had ownership the entire time. In other words, its hypothesis was that it owns the cars.

Re-hypothecation is like a retread of the car loan. Say Billy the banker wants to borrow ten thousand dollars from Jimmy the Shark for a trip to Las Vegas. Billy has nothing to give up for collateral (he rents his home and leases his car), so he says to Jimmy, “I lent Paddy ten grand to buy his car. Can I use that car as collateral?” If Jimmy agrees, then he’s essentially agreeing to lend money using collateral that’s already being used as collateral! That’s re-hypothecation.

Actually, now I think about it, maybe it is magic after all!

The Fed’s announcement of its deal with the ECB this week means essentially one thing: it’s easier for Europeans to get dollars.

But why do they need dollars? Why can’t they use euros? After all, they spent ten years creating the euro, why not use it?

There are a couple of reasons why Europeans need dollars. First, because many companies always do business in dollars, rather than in euros or yen or won or whatever. Why? because it’s easier. If you’re an Irish motherboard maker, and you need semiconductor chips from Korea, you don’t want to use won, because you have convert your euros, and that can be tricky and maybe expensive and it can take a while. And your Korean chip supplier doesn’t want to use your euros because she has suppliers in Japan and Taiwan, and in order to pay them, she’d have to convert your euros into won, yen and Taiwanese dollars. In other words, your Euro is a pain in her butt.

Which is why she suggests using American dollars. It’s a currency that companies all over the world know and trust, whether they’re in Japan, Taiwan, Kenya or Iceland. Most importantly, it’s a currency everyone has access to. It’s quick, easy and takes care of a lot of problems when it comes to doing business across borders.

So that’s what businesses buy dollars, and in fact there is always an active market for dollars in Europe. That’s not to say that companies didn’t do business in yen or euros or whatever. They did, but American dollars were the most popular form of currency out there.

But something else has been driving the need for dollars in Europe recently. Companies that might have done business in euros in the past are turning up their noses at euros now. Small wonder - who knows where the euro will be in six months or a year. Maybe stronger, maybe weaker, maybe worse. Would you accept payment for something in a currency that might not even exist in 12 months? So now many European companies are being pushed to do cross-border business almost exclusively in currencies other than euros. So that’s driving demand for dollars. Worse still, many European companies are rejecting their own currency, perhaps anticipating that the euro may not survive and that the dollar is the safest thing to buy. Swiss francs might be safer, but they’re terribly expensive.

So the yankee dollar it is. Without dollars, many European companies simply can’t do business. And if those companies can’t do business, then they will fail. That’s why European companies have been chasing dollars so madly, and driving up the price. The Fed’s deal with the ECB - I’ll explain exactly how that works in another post - is supposed to push the price of dollars back down. It seems to be working for now, but it needs to work for longer - long enough to allow the Eurozone nations to fix their deep fundamental problems. If they fail to move quickly to make those amends, or if the Fed’s moves don’t work, then European companies will begin to fail. And that will cause big problems for all of us.

There’s been a lot of talk recently about the need to ring-fence certain economies in Europe. These aren’t the economies that have defaulted or been bailed out; these are the economies that are too big to fail. Italy is the most glaring example.

Right now Italy is solvent. Its bills are rising fast, but it can still pay them. If interest rates on Italian debt keep rising, however, it won’t be able to pay that interest and it will default. And Italy is simply too big to bail out.

So how to pull Italy back from the brink?

Ring-fence.

Ring-fencing is a fairly common technical term in finance. It’s what you do when you identify some money that you’re going to use for something specific in the future. In order to make sure that money isn’t spent in any other way, you ring fence it. Its a bit like four brothers who save up $500 to buy an X-Box in the New Year sales. They put the money in an envelope and give it to their Mom. That way they know none of them can use the cash between now and New Year to buy gifts or candy or whatever. That’s ring-fencing: no-one can get in and get their hands on the money, and the money can’t “leak out.”

So how does that relate to Italy, for example? Well, Italy needs a fence around it, firstly to stop its problems from leaking out and doing any damage to the rest of Europe - or us, for that matter. And it needs the fence to protect it from interference - to quarantine it, if you like - so that people who know how to fix economies can get in under Italy’s hood and sort the place out.

Italy’s big problem is its rising cost of debt. Those costs are rising because investors are worried about Italy, so they’re demanding more and more yield on their investment in the country. They’re buying bonds in the secondary market at a deep discount, which is forcing up the price of any new bonds that Italy sells. So how can Italy stop its bonds from falling in the secondary market?

It needs to convince investors that all will be well, that it will reduce its costs and find ways to generate more revenue by making its businesses more productive. But investors are having a hard time believing anything Italy’s leaders say right now. Which is why Italy needs someone to step in and build a fence to block those bonds from falling. Someone needs to give investors a guarantee, perhaps a pledge to make good on every Italian bond. If investors know Italian bonds are a safe investment, they’ll stop demanding a deep discount, the price of those bonds will stop falling in the secondary market, and Italy won’t have to pay as much to issue new bonds. That will buy it the breathing room it needs to get into the guts of its economy, cut its government spending and make the regulatory reforms its private sector desperately needs.

But who’s going to erect that fence and make that guarantee? Italy can’t afford it; the US won’t do it, and neither will China. The European Central Bank, perhaps? Or Germany? Right now, no one seems willing to step up, and that’s making investors very nervous indeed.

Elizabeth Warren is right, the people on Wall Street did break this country, but that kind of misses the point. Big financial institutions, public or private, are glands. Like a gall bladder, which is solely designed to produce bile, so a bank’s sole mission in life is to make money for its shareholders. These are not moral entities, they never have been, and we may as well get used to the fact that they never will be.

Here’s another analogy. Our big banks are like dobermann pinscher puppies. The dobermann is a great dog, potentially a very effective protector, a great family dog, extremely loyal and obedient. But the dobermann has a reputation for a reason. They are extraordinarily strong dogs, they have wildly sharp teeth, and they can be very aggressive. They can wreak havoc.

If you train a pinscher properly it will grow up to be the former. If you fail to discipline the dog early on, it will go wild. As a pup it will chew up everything in the house and tear your sofa to shreds. As an adult it could turn out to be unpredictable, aggressive and dangerous in all the wrong ways.

Our big banks are exactly the same. They need boundaries, constant monitoring and correction. Actually, they’re not exactly the same. Puppies grow up, but America’s big banks have proven to be perpetual juveniles. They have shown, time and time again, that they cannot be left solely to their own devices. Every time we’ve let them run free, they’ve chewed up the fabric of our financial system. The last time they nearly ripped it to shreds.

I don’t think I’m saying anything that isn’t blindingly obvious. Which begs the question,  why are we running around screeching at the dog, when we should be going after its owner? The dog can’t understand us - it sees we’re angry, but smart as it is, it speaks dog, not human, so we’re wasting energy. We could shoot the dog, but we know the owner will only get a new one, and because the owner won’t give the dog boundaries or discipline, we’ll be right back where we started.

It would be nice to think that we the people can discipline the banks, but we can’t really. We’ve outsourced that job to our representatives in Congress. There’s an entire alphabet soup of governmental organizations supposed to be keeping the big banks in line, but they can’t even make the banks sit, let alone bring them to heel. Why? Because our representatives have systematically emasculated our regulators over the years. Slowly but surely, Congress let the leash slip, until the dog was able to rush off on its own and do all the damage it liked.

So while Elizabeth Warren is right about Wall Street breaking this country, she’s only half right. Maybe only a quarter right. Wall Street deserves to be punished for its actions (or lack of them), but the responsibility for the big banks’ actions lies primarily with the government. Thanks to the financial crisis, the banks are hanging their heads a bit now, like a dog that realizes that its owner is enraged by the destruction of the sofa. Warren knows this is an opportunity for the government to get Wall Street under control again, and put the appropriate boundaries in place. Like us, she’s on the march, and rightly so. Unfortunately, also like us, she’s sending her message in the wrong direction. Washington should be the object of her anger, not Wall Street. Because shouting at the banks isn’t going to help: the dog ain’t gonna put the leash on itself.

Most Americans believe their retirement won’t come early or be particularly comfortable.

Three-quarters of Americans think they’ll have to work during their retirement years. Nearly fifty percent of those say they’ll continue in the same job or one of similar responsibility. One quarter say they don’t believe they’ll be able to retire at all until they’re 80 years old.

These are the rather depressing results of a new Wells Fargo survey. Only 1500 Americans were polled, according to a Reuters report, but the stats are sobering. The main factor tarnishing their retirement dreams? Savings. Fifty-three percent of those surveyed said they need to significantly cut back on spending now to save for retirement.

“For several years now, we’ve seen that Americans are undersaving for retirement and a majority do not trust the stock market as a place to invest for retirement,” Joe Ready, Well Fargo’s director of Institutional Retirement and Trust, told Reuters.

This is bad news for boomers nearing retirement, but it’s also pretty bad news for the economy. Americans that are being spooked into saving more will naturally not spend as much as they did in the past. And right now we need someone to spend. Congress won’t do it and the banks won’t do it, so it’s up to Joe and Wilma Public. And because Joe and Wilma are becoming increasingly skeptical of government’s ability and/or willingness to provide for them in later life, they’re socking away every penny they can. You can’t blame them for that.  

When you climb very high mountains, at about 26,000 feet you enter the Death Zone. At that altitude, there’s simply not enough oxygen in the air to sustain human life, and humans who enter the Death Zone without supplementary oxygen know they can only survive up there for a small period of time.

Europe’s Death Zone appears to be the point at which interest rates hit seven percent. That’s when Ireland, Portugal and Greece needed oxygen - otherwise known as a big chunk of bailout money. But Italy may be made of sterner stuff. Here’s the thing about altitude: it affects different humans in different ways. Depending on your physiology, you might not feel any effects of altitude, while everyone around you is collapsing.Some very strong people are able to climb the highest mountains in the world without supplementary oxygen.

How do you know if you’re this kind of person? One way is to look at personal history, and a glance at Italy’s history shows that it has spent a little time in the Death Zone before. Back in 1993, Italy’s public gross debt was roughly 116 percent of GDP, and the yield on its ten-year bond was higher than 12 percent. In 1995, yields jumped to more than 13.5 percent, and debt-to-GDP was 129 percent. That’s pretty hypoxic.

It’s true, today Italy has more debt than it did in 1995. But not an enormous amount more. Gross debt to GDP today in Italy is around 135 percent. But the interest rate Italy is just seven percent, half what it was in 1995. And Italy seems bent on reforms that should make the country more productive and efficient.

There could be a lot more life in the old dog yet.