Thursday, December 1, 2011

So now we know

On Monday, I composed a post that took the world's central bankers to task for not creating enough money to stave off the collapse of the Euro.  And it is a pretty good post.

But surprise, surprise, surprise!  The world's big central banks led, it appears, by the often-maligned Ben Bernanke managed to cobble together a scheme of a coordinated monetary re-inflation of the threatened European Union.  Now the story of who did what to whom and for what reason will probably take a least a year to get right, but there are several things that we know already.

1) This could have been done years ago.  The option was always open.  This sort of thing was done by the Fed during World War II as a normal operating procedure.  But to the "sound money" guys, this is a major sin.  Expect the howling to commence.

2) The banksters managed to get a lot of austerity measures passed before they "caved" and adjusted the money supply.  When the story comes out, we will discover that the triggering mechanism this week was a near-death experience by a major name bank.  Commerzbank has been mentioned but only a handful of people actually know so far.  What we know from this is that banksters are only too happy to watch a society like Greece disintegrate into chaos but if one of their own members gets into trouble, rules written on two tablets of stone CAN be adjusted after all.

3) This action was ONLY directed at saving the financial institutions.  Actually re-inflating the real economy is not even being discussed.  Example: we just found out that the Fed pumped $7 TRILLION into the banking system in the past two years.  As far as anyone can tell, all this "money" did was change some numbers in a bank's computer somewhere.  If $7 TRILLION was pumped into the real economy, it would employ 20 million people at $50,000 a year for SEVEN YEARS.

So I was wrong.  The central bankers of the world CAN push the necessary buttons to save the economy and I thought they were too ideologically confused to do it.  The trick will be if they can perform this magic for someone other than their buddies.  Only if THAT happens will I be convinced that the big moneychangers are something other than pathological greedheads.

But hey, the markets loved it.

Dow closes with largest gain since March 2009
By Maureen Farrell @CNNMoneyMarkets November 30, 2011

NEW YORK (CNNMoney) -- Investors around the world raced to scoop up stocks on Wednesday, after the Federal Reserve said it will work with other central banks to support the global economy. 
All three major stock indexes closed the day up more than 4%. The Dow's 489-point gain is the largest of 2011 and the best percentage gain since March 2009. Still, despite today's run-up, the Nasdaq and S&P 500 are down for the year.

The central banks' coordinated market intervention gave investors hope that world leaders could take necessary steps to avoid a credit crunch or market paralysis stemming from Europe's sovereign debt crisis. 
"It's the first time we've seen this type of global coordination since November 2008," said Michael James, a senior equity trader at Wedbush Morgan. "The degree of coordination sends a message to the markets that global leaders are going to do whatever they need to do to instill confidence in the markets." (Read: Welcome to the Great Global Easing
For now at least, investors appear willing to ignore any possible parallels between today and November 2008, and just how precarious the state of financial system might be to warrant such a move by global bankers. more
Sort of lefty commentary from FireDogLake
Central Banks Move to Stop European Liquidity Crisis, Just One of Many Eurozone Crises
By: David Dayen Wednesday November 30, 2011

Six central banks took coordinated action to ensure liquidity for the global banking system. During the European crisis, banks in Europe in particular have had trouble securing lending, which could lead to an event not unlike the fall of Lehman Brothers. The European Central Bank, the Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland made an announcement that would help prevent that from happening. How are they doing this? By giving out more free money via lending in US dollars:

The statement said the central banks have agreed to reduce the cost of temporary dollar loans to banks – called liquidity swaps – by a half percentage point. The new, lower rate will be applied to all central bank operations starting on Monday. 
They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant by establishing a temporary network of reciprocal swap lines. 
So European banks can now borrow dollars to fund their day-to-day operations through a network of central banks, and they can get those dollars cheap. This should address part of the liquidity crisis. 
Now, if the world were only worried about a liquidity crisis in Europe, we’d be all set. The problem is, As Karl Smith points out, much more widespread than that:

I haven’t completely sorted this out yet but for a number of reasons I believe that the ECB has lost control of monetary policy in the Eurozone. 
By that I mean the ECB is no longer controlling the marginal cost of funding and that indeed the cost of such funding is rising much higher than the official 1.25% rate, at least up to 2.25% and perhaps as high as 6 – 7% [...] 
This malfunctioning appears to be down right mechanical with trades regularly not settling on time, collateral not being delivered, awkward interventions by local regulatory agencies and a host of other deep, deep problems. 
I don’t have it all sorted out but its not clear that there is a fully functioning money market in Europe right now. Well informed opinion suggests that there is literally a shortage of know-how on the ground.  That is to say, some large banks or brokers cannot trade in certain types of paper because they don’t have anyone on staff who knows all of the relevant institutional details. 
The opening of temporary swap lines could mean that other central banks can step in with expertise, but from this is sounds like they would have to replace the staff of practically every European bank to fix things. 
And then there’s that whole insolvency crisis. Eurozone ministers are still talking in vain about their precious bailout fund, the EFSF, now trying to get the IMF to invest in it. It’s a bit like someone rolling into town and asking you to invest in their magic bean factory. Unfortunately for the Eurozone, none of the entities they are courting are that stupid. The plan is still to leverage the EFSF as a kind of CDO, which is almost criminally insane. And they still won’t reach their goal number needed to cover potential bailouts of Spain and Italy. more
And from the goldbug right.
Holding the EU together by Money Printing and Force
30 NOVEMBER 2011
By Greg Hunter’s

The European Union is frantically trying to come up with a plan to fix the debt crisis that is threatening to cause a worldwide financial calamity. It seems every day there’s a new idea to save the union. The latest is some sort of backdoor bailout through the International Monetary Fund (IMF). Why doesn’t the European Central Bank (ECB) just take care of the bailout by itself? It legally can’t according to the treaty that formed the European Union. That hasn’t stopped the central bank from bailing out countries anyway. But now, debt levels are reaching a critical stage as in a possible default, and the biggest problem is Italy. is reporting, “If Italy defaults on its debt of 1.9 trillion euros, the fallout could spell ruin for the euro zone and send shockwaves throughout the rest of the world. Yesterday, Italy’s borrowing rates skyrocketed to record highs in a 7.5 billion euro bond auction. The yield on its 3-year bonds surged to 7.89 per cent, 2.96 percentage points higher than last month, while yields on 10-year bonds spiked to 7.56 per cent, up 1.5 percentage points.” (Click here for the complete report.)

The key to saving the euro is Germany because it is the richest of the EU countries and can use its industrial might to help support a bailout fund. But, Germany has been reluctant to bail out deeply indebted countries. Now, calls to bend to pressure to save the day and keep the union together are reaching a fevered pitch. The Guardian UK reported earlier this week, “The Polish foreign minister, Radoslaw Sikorski, urged Germany to save the EU from “a crisis of apocalyptic proportions.” The Moody’s ratings agency predicted that a euro exit by any country would trigger a cascade of sovereign defaults across the eurozone. Jean Pisani-Ferry, director of the influential Bruegel think-tank in Brussels, said that “real businesses” as well as the financial markets were now “pricing in a break-up scenario … If disaster expectations build up and a growing number of players start positioning themselves to protect themselves from it, the consequences could become overwhelming.” (Click here for the complete Guardian UK story.)  
So, “any country” that stops using the euro “would trigger a cascade of sovereign defaults across the eurozone.” This reminds me of the verse from the song “Hotel California” that goes “You can check out anytime you like, but you can never leave.” The EU sounded so good when it started, but now it has turned into a nightmare where democracy is smothered by bankers. Defaults would, no doubt, cause the bankers to lose power and lots of money. That is not going to happen without a knockdown, drag out fight. Paul Craig Roberts, former Assistant Treasury Secretary in the Reagan Administration, wrote last week, “The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.” more


  1. So how does this new money that's been pumped into the system get repaid, and by whom? I thought the whole point was the banks are upside-down with worthless assets. I don't get it.