Eurocrisis Roundup

If I understood how to fix all this, I'd be the prime minister of the European Union (if such a job exists), king of Latveria, or secret chieftain of the Gnomes of Zurich, or some such prestige gig.

Though, libertarian ideologue that I am, I somehow suspect lessons involving not letting governments go all nutso-crazy with borrowed made-up money are to be found in and around this crisis. That's one of those unrealistic libertarian suggestions that involves government having not done the horrible thing libertarians told them not to do in the first place, and thus proves how libertarians are unrealistic and not worth listening to when it comes to a real crisis–you know, the kind of real crisis only not listening to libertarians can create. It's a dilemma.

But here's some bits of pieces to help you wallow in the gloom:

*The debt-swap bail out seemed to momentarily delight Wall Street!

The world's major central banks unveiled a new strategy Wednesday to keep Europe's debt crisis from choking off global lending, a dramatic step that comes as the availability of credit for businesses and consumers has shown signs of freezing up.

In an action that recalls the depths of the U.S. financial crisis three years ago, when global central bankers took coordinated steps to stem a worldwide panic, the U.S. Federal Reserve and five of its sister institutions agreed to supply one another with unlimited amounts of each country's money at a reduced cost. Most immediately, this initiative means the European Central Bank can pump dollars into banks in the troubled euro zone at low interest rates.

The announcement, coupled with a separate move by China's central bank to loosen bank lending, sent stocks soaring on Wall Street and in other financial capitals. The Dow Jones industrial average rose 490 points, or 4.2 percent, the strongest gain in more than two years.

*….which made supporters of "Occupy Wall Street" very suspicious and kind of bummed:

Every major bank in the world is insolvent, whether it be in the U.S., Europe or China. These Central Banks are owned and controlled by the very banks they are bailing out. They are telling you they have it under control. They do not. They have lost control. The debt is too great and will destroy the economic system of the world.

This is a last ditch effort by those in power to grab the last vestiges of middle class wealth. The stock market will soar today, benefitting bankers, politicians, and the 1%. They have solved nothing. The debt remains. The debt will not be paid.

Oil, food and commodity prices immediately soared on this announcement. Again, the wealthy will get richer and the average American will be destroyed by inflation on the things they need to live. The game goes on.

*The always-ornery folk at Zerohedge try to explain what's actually happening. It's long but worth reading in its entirety, especially given that I'm not at all sure I could paraphrase it with rigorous technical accuracy. Key political economy points (hint, and always a good hint: It's about the Goldman Sachs):

There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing…..Rating agency, Moody's  announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman, making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.

Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to  $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )

Breaking that down:  JPM Chase holds 11% of the world's derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don't – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government…..

Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman's loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital  it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure. 

Sadly, until there's another FED audit, or FOIA request, we're not going to know which banks are the beneficiaries of the Fed's most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.

But we do know from the US bailouts in phase one of the global meltdown, that providing 'liquidity' or 'greasing the wheels of ' banks in times of 'emergency' does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn't fix anything, it just funds bad trades with impunity.

In other words, moral hazard continues to crush the world, and, uh, End the Fed!

*Tyler Cowen defends the German position of "don't make us pay for everyone else's goddamn problem" as an intellectual exercise (that is, he's speaking for that perspective without openly claiming to agree):

When it comes to debt, the periphery countries simply don't want to pay up.  Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece.  It's amazing how many people won't come out and utter or recognize this simple truth.  Italy for instance doesn't have to make a huge fiscal adjustment…..Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members…..

One clear warning sign of trouble is when you see "trade imbalances" put at the center of the argument, as if "being very productive" and "not being productive enough" were somehow the same kind of disease…..

 Another doozy is to think the problem is due to some weird German obsession with Weimar-era inflation, as if there is a need to apologize for an elderly uncle who went bonkers.  I would instead start with the simpler point that Germany does not want to transfer resources to countries which do not wish to pay back their creditors, and which will not commit to good economic policy in the future.

Gold and silver going not quite as crazy as I might have thought this week.