The New York Times reports that the brilliant analysts at S&P have decided that if the banks that loaned all that money to Greece have to eat any losses, voluntarily or otherwise, S&P will call that a default. If they are correct, those who wrote protection credit default swaps (CDSs) on Greek debt would be forced to pay off on the losses incurred by buyers of protection. In an earlier article, In Greece, Some See a New Lehman, the NYT provided another scare article threatening catastrophe after a Greek default.
You’d think there was some kind of conspiracy to protect US and European banks and CDS protection writers from losses they richly deserve. I’m smelling Moral Hazard. Why should anyone care if they lose billions? These articles are designed to scare people, sort of the bankster version of those local TV teasers about lights showing crud on motel bed covers, trying to get you to watch their vapid talking heads.
As an opening shot, the NYT reports that European banks have been dumping Greek debt onto the European Central Bank and the IMF, which the NYT explains dumps the losses onto taxpayers. How that happens is a mystery to me. The ECB controls the Euro, and if anyone is worried about the IMF, central banks can print some money just for it. That is glib, but essentially correct, and it isn’t a catastrophe for anyone.
Second, a lot of US money market funds provide short term loans to European banks, which pay a somewhat higher interest rate that US banks, currently swollen with free cash from the Fed. We are supposed to be very afraid that European banks won’t repay that short-term debt. That warning came weeks ago, and the Fed has put contingency plans in place for this unlikely outcome. These loans are short-term, and at least some of it is repurchase agreements, meaning that the loans are collateralized in full. That isn’t a catastrophe, either. And if money market funds lose money, people will leave that industry and put their money back in US banks, which sucks, but again, not a catastrophe. And I bet there are trial lawyers who can bludgeon the money market fund managers into making people whole.
The third fright is credit default swaps. If S&P is right about the default, it will trigger money movements. The analyst Kash at The Street Light provides a very rough estimate of US CDS exposure on Greek debt of $35 billion, but that doesn’t seem to cover all the CDSs laid off on hedge funds and insurance companies. Maybe that will be a problem, but I’m sure it matters only to the losers, and not the winners. JPMorgan Chase has a pile of CDSs on Greek debt, no doubt, but it may have both long and short CDSs, so who knows if it has any net exposure. A lot of those CDSs are collateralized, which will mitigate any problems. Anyway, a little excitement is good for them.
Kash estimates that direct creditors, those holding Greek bonds, would eat 70% of the losses, and protection CDS writers would eat the rest. The total amount of Greek debt is about $480 billion. If holders of Greek debt eat say $120 billion, about 25% of the losses, CDS protection writers would pay off $36 billion. That isn’t a catastrophe. It’s fun for all of us to watch the gamblers pay off, or go whining to their new Tea Party friends for a bailout.
Why would we rob any of them of their just desserts? Especially when it is so obvious that the intent of the banksters is the actual destruction of the Greek government, to be replaced by the first true corporatacracy. The nation that gave rise to democracy can lead into the brave new corporate future.
1: Capitalism’s now a lethal soul sickness, needs a reawakening
What’s the real problem? Not the economy, not markets, nor even politics. Yes, our economic pains are real. But they’re just symptoms. Something’s structural wrong. Since 2000 endless bad news: Greed, deceit, stupidity, corruption, unethical behavior, lack of moral conscience.
The real problem’s deep in our character, the “mutant capitalism” Jack Bogle warned of in “The Battle for the Soul of Capitalism.” Sadly, that battle was lost. With it we lost our soul, our moral compass. America’s character is measured by our net worth.
2. We’re already in the early stages of a Great Depression
Comparing today with the Great Depression is common sport. In a Newsweek special “Seeing Shades of the 1930s,” Dan Gross wrote: “Wall Street, after two terms of a business-friendly Republican president, self-immolated on a pyre of greed, incompetence and excessive optimism.” Today’s “new normal” economy means high unemployment for years, inflation driving prices, rising interest rates, more debt, chaos.
We are destroying ourselves from within. Former U.S. Comptroller General David Walker warns that “there are striking similarities between America’s current situation and that of another great power from the past: Rome.” Three reasons “worth remembering: declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.” We are becoming more vulnerable to external enemies.
3. Good Depression exposes our self-destruct bubble-thinking
Before the 2008 crash, “Irrational Exuberance” author Robert Shiller warned in the Atlantic magazine that “bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming.” Housing inflated 85% in the decade: “Historically unprecedented … no rational basis for it.”
Bubble thinking is an toxic virus that infected everyone. Shiller warns of another coming: “We recently lived through two epidemics of excessive financial optimism … we are close to a third episode.”
4. Good Depression will stir outrage, force real reforms
Writing in the Wall Street Journal, Jim Grant, editor of the Interest Rate Observer, wrote: “Why No Outrage? Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too tolerant populace.” Grant worries that Wall Street will run “itself and the rest of the American financial system right over a cliff.”
But we only went to the edge in 2008. Today, a rebellious “throw the bums out” hostility is blowing a new kind of bubble: Three years ago we did not have Tea Party, union fights, the Arab Spring and Greek austerity riots, all signs of an dark angry future sweeping across America.
5. Good Depression forces Wall Street to think outside the box
In a powerful Bloomberg Markets feature, “No Easy Fix,” we’re told Wall Street’s “profit formula has hit a wall.” Their “money-making machine is broken and efforts to repair it after the biggest losses in history are likely to undermine profits.”
Even Mad Money’s Jim Cramer openly admits hedge fund managers are pocketing megaprofits at capital gains rates while laughing at the stupidity of a broken political system that gives hundreds of billions in tax breaks to the richest, then takes taxes off the table as our middle class is dying under massive unsustainable deficits. Soon angry mobs will “fix” Wall Street.
6. Good Depression will deflate America’s warring soul
The American economy is a “war economy” driven by a egomaniac. I saw it firsthand as a U.S. Marine. Americans love being king of the hill, world’s cop, the global superpower. Why else spend 54% of our tax dollars on a war machine, 47% of the world’s total military budgets.
Why? Our war machine generates such “spectacular profits that many people around the world” are convinced America’s “rich and powerful must be deliberately causing catastrophes so that they can exploit them,” warns Klein in “Shock Doctrine.” No wonder the GOP takes military spending, like tax cuts for the rich, off-the-table: The war industry is a major political donor.
7. Good Depression now … avoids a far bigger depression later
In “The Price of Liberty: Paying for America’s Wars,” Robert Hormats, undersecretary of state and a former Goldman Sachs vice chairman, traces America’s wartime financing from the Revolutionary War to present wars. He warns that today we’re “relying on faith over experience, hoping that sustained growth will erase deficits and that the ballooning costs of Social Security, Medicare and Medicaid will be manageable in the coming decades without difficult reforms.”
Absent a brutal reset, we are on a historically predictable course says Kevin Phillips, Nixon strategist and author of “Wealth & Democracy:” “Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.” Yes, burned out, unprepared.
So pray for a Good Depression earlier rather than later. Choose now and we can be prepared for whatever comes. Or a Great Depression will hit later, when we’re least prepared, the problems bigger, our faith weaker … don’t raise the debt ceiling.
And the take home message:
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