What effect will the European Banking Crisis have on the US economy?

As regard Europe, here is what I know: Out of total US exports (about $1.8 Trillion or 12.5 % of our GDP). European Union makes up about 16.3 %  and Euro zone about 12 %. So the total % of our exports to Europe as a share of our GDP is between 1.4 to 2.0 %. Even a 10 % contraction in Europe will have minimal impact on our GDP (0.14 to 0.2 % contraction).  On the other hand we get about 2.66 % of our imports from Europe – so European recession (and a plunge in Euro) will reduce our cost of imports which will make goods from Europe cheaper (and auto parts, chemicals and airplanes) and improve profits for our companies or leave more money for consumers to spend on other goods or save.

The major issue is what impact will the financial crisis in Europe have in US capital markets. In the near term there will be a flight to quality which means more people are moving their money to US (our 10 year treasury rate is 1.57 %). This reduces our cost of borrowing which is beneficial to the US economy.  However in the longer run European banks in order to maintain capital ratios will curtail their lending to US which might raise the cost of borrowing for companies. Also a credit crunch in Europe might put some European suppliers at risk due to lack of availability of credit putting US supply chains at risk.

I feel the media (CNBC/Fox Business News) should stop beating the doom and gloom drums about Europe and focus on the US economy and the fiscal cliff. The damage is more likely due to psychological reasons than trade or fiscal reasons.

On the role of regulations and free markets

The problem with not having any regulation is that 'free markets' don't always take into account social net present value of projects – for e.g. Noise impact of Third London Airport . So sometimes (even a Chicago guy like me would admit) that Free Markets fail because they are applied in a very narrow scope. I do feel that we are over burdened with regulations. I think the problem today is not whether there are enough regulations, I think the problem is lack of consistent interpretation, resourcing of regulating bodies and enforcement with existing regulations.

On the flip side I as a CEO have rarely made an investment decision (or delayed one) because of excessive regulation or health care burden – I think the uncertainty in demand in the single largest factor in preventing people from hiring or adding additional capacity. This can be largely attributed to the slow recovery of the housing market which has been highly interfered with and distorted by politicians and regulators.

I do think Fracking needs to be carefully expanded after ensuring proper procedures are developed for casing/cementing of wells, making sure excessive water is not consumed and whatever is discharged is treated right to avoid ground water contamination. Given the glut of natural gas I think the fracking industry has some time to get it right and make it a sustainable energy source that abundant natural gas can be.

I am overall very bullish on America because of the following factors: 1) Great resource of energy in natural gas; 2) Competitive manufacturing which is going to bring manufacturing from the developed world to the US – Japan, Europe etc.; 3) Innovation and ability to bring new technologies to market; 4) The system infrastructure – rule of law, transperancy, overall low corruption, physical and information infrastructure etc. I do think it is time for a 2nd morning in America and it doesn't have to be at anyone else's expense.