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Euro bailout. Now banking risk morphs into geo-political risk

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Paul Mason | 08:29 UK time, Monday, 10 May 2010

The euro bailout deal consists of several massive moves and, as far as the eurozone is concerned, signals a fundamental change. But not the end of the global crisis. If 2008 transferred global risk from banking to state finances, this transfers instability from the sphere of state finances to the sphere of global and social politics

Here is my first shot at explaining what they have done. Pitch in if you think I have got bits wrong as we are all still struggling with the detail.

To counter the risk of the Greek crisis spreading to Spain, Portugal and Ireland the 27 EU countries have created an emergency loan facility of 60bn euros. That means that the debt markets no longer have them by the throat next time they need to go and issue bonds.

But 60bn euros would never be enough to counter the strategic problem. The strategic problem is that the eurozone authorities were not seen to stand behind their own currency under speculative attack and the danger of default. So they have created a complex loan facility coming to 440bn euros. On a "pro rata basis" the 16 eurozone governments have signed up to back this loan facility, which could completely swallow up the debts Spain, Ireland and Portugal.

The fact that this is called a "special purpose vehicle" - a term we all remember from Enron, Lehman and the London Tube PPP - gives the game away. Like all SPVs it is designed to make unclear who ultimately shoulders the risk. Since "Europe" does not have any money itself, the implication is that Germany, France and Italy now stand behind the rest of Europe. But the implication will be hidden behind bilateral deals, clauses etc.

On top of the 440bn euros, the International Monetary Fund (IMF) has pledged 220bn euros. It is clear where the IMF money comes from - its member states, which again include France, Germany, Italy - but more importantly here the USA, Canada, Britain, Japan etc.

Since the IMF is a lot less flaky an organisation than the European Union, and always demands strict conditions, I am assuming the IMF pledge is "senior" to the EU one. That is, the IMF gets its money back first.

Then, on top of all this, the European Central Bank (ECB) has decided, in effect to do quantitative easing: it will buy up government bonds - and it will accept rubbishy debt as collateral for borrowing clean, shiny euros. This reverses the entire course, and culture, of ECB policy since foundation.

However, I am not clear how much money the ECB will actually print. The key point is this is a massive policy reversal for the ECB and has political implications.

All this comes on top of the 110bn-euro bailout of Greece.

And there is more. The US Federal Reserve has re-activated the measures it used in the autumn of 2008, which allow banks to borrow in dollars without having to actually make the currency exchange, and therefore stop the global credit markets from retreating into national or continental fortresses.

Now - what is it designed to do and will it work? And how does it change the eurozone?

The core problem is the lack of credibility of the deficit reduction plans on the eurozone's periphery. Greece was the extreme example: no way could it borrow at manageable interest rates on the markets so the eurozone agreed to lend the money, giving it more time to cut its deficit but demanding tougher conditions.

But the markets did not believe the Greek people would ever accept these conditions; and they believed Greece would "restructure" its debt - so they would only get a percentage of their money back. So they ramped up the cost of lending to other eurozone governments.

This move knocks that problem on the head. The key weapon is not the 440bn-euro loan facility - which as I write only exists on paper. The weapon is quantitative easing - buying up debt to pump money into the system.

Why it is radical becomes clear if you compare it to the Bank of England's move to print £200bn. That £200bn shows up on the "balance sheet" of the Bank, not the British government. But the Bank of England is ultimately an arm of the British state - whatever its formal constitution says. Ditto the US Federal Reserve. However, the ECB is a central bank without a state to underpin it.

The move to printing money is a signal that the EU has to create something more like a state to back the ECB.

Not only is the EU now committed to much stronger fiscal - i.e. tax and spending - oversight. It is now implicitly committed to becoming an economic super-state.

Now, will it work? In the short term it should. The reason it seems to the European governments that "speculators" are attacking them is because we have created a huge economy of derivative financial instruments - the biggest being interest rate swaps - that are supposed to enhance market functionality but which in fact have an inbuilt tendency to punish stricken states.

But considering the scale of intervention, it has to work. The very scale of the action reveals that the eurozone crisis was at least as big as the Lehman-induced meltdown of 2008. We found that hard to grasp because instead of panic stricken bankers in Manhattan the signal was fighting in the streets of Athens.

But here is the problem. What we have been dealing with since September 2008 is, to put it really clearly, money lost. Half the value of the world's stock markets was wiped out; bank shareholders were wiped out and bank debtors lost a lot. That caused a mini-slump and a trade collapse which was only reversed by the massive injection of taxpayers' money into the economy, and by printing money, and by some countries devaluing their currency.

But mounting losses reduce growth. The actions of the G20 transferred the risks and losses from banks to states - but states cannot bear losses on this scale if their economies do not grow. The whole contagion risk - from Greece to Spain to the UK - lay in the fact that states were refusing to accept the level of budget cuts needed because they had agreed to assume the losses.

The overbearing risk to the global economy had always been a debt-deflation spiral, where the cost of meeting unpaid debts led to low growth, falling prices and wages, the collapse of state finances and the need for governments to then adopt policies which worsen the downturn. This is what happened in the early 1930s and is called "pro-cyclical" in economics.

Now, from Washington to London to Frankfurt all that stands in the way of debt-deflation is the state. In the form of massive money-printing exercises through central banks; and in the form of states underwriting the banking system; and in the form now of big states agreeing to stand behind small states.

Britain's maximum exposure, if all of the money was lost, is £8bn - says Alistair Darling. But our moral and political exposure is much larger.

For this massive, shock and awe style bailout does not make the risk disappear. It simply transfers the risk in southern Europe to the governments and taxpayers of northern Europe through the parallel mechanisms of the Lisbon Treaty (a 27 nation bloc) and the eurozone (a 16 nation bloc). And in fact once again the US Federal Reserve has assumed some of the global risk - its balance sheet will have to expand to do the currency swaps.

We are only beginning to get our heads around the detail of this deal but its geo-strategic and moral implications are clear. Big states have bailed out little states and will demand reforms that change the lifestyle of people in these states forever. Northern Europe has effectively seized control of southern Europe. The eurozone is on a path to becoming a supra-national state-like entity.

But because every step of the EU project has been taken by elites, with the populations left to work out what was happening months and years later, we can now trace very accurately where the risk has been transferred to. It has been transferred to politics: will the people of Europe accept the consolidation of the eurozone, with the loss of economic sovereignty that represents?

In short, in a matter of two years, we have transferred risk from the banking system to the state finances to the streets. And the risk is only partly dissipated by this transfer.

In looking for a metaphor to describe the anti-crisis measures, I am thinking of tank armour. It consists of layer upon layer of complicated material - ceramics, metals, fabrics - which diffuse impact. When a sabot round goes through one layer it loses energy, then the next, then the next. If you are lucky it never penetrates the final layer and the crew survives. But take a look at the armour: it is destroyed, mangled, defabricated. It can never be used again.

Comments

  • Comment number 1.

    We are all just living in the greatest Ponzi scheme of them all.

    Madoff...eat your heart out!

  • Comment number 2.

    Are we to interpret that, at great cost, the EU has outrun the markets for a while. The geo-political forces you identify as unleashed will take years of cultural change to embed (if ever) into Southern Europe. The markets effectively said a Hard (North European) Euro or No Euro at all. The final skin of armour has to be high quality German/British steel or you might as well use a snatch Landrover.

    Where will the markets attack next? Non-EU Eastern Europe? They will not wait around for the next game to show up.

  • Comment number 3.

    An excellent post with a very scary conclusion. The banking crisis was bad enough - with complex financial instruments obscuring risk. Now it looks like states and supra-national institutions are creating new generations of derivatives, exotics and hedge funds that we all underwrite. It looks like we're seeing ripples of consequences from endemic risk turn into tsunamis.

  • Comment number 4.

    Europe is prepared to debase their currency.
    Stagflation.
    This means declining living standards.

    Under such conditions can Germany & France agree to merge their fiscal sovereignty?
    Governments may want it but their people will be on the streets resisting cuts.

  • Comment number 5.

    BLESSED ARE THE INDOLENT, FOR THEY SHALL INHERIT THE DEBT.

    Britain can 'boast' a series of bizarre personalities as Prime Ministers. These weirdoes have cost us dear, in all aspects of life - war being recent, and obvious, and now money.

    It is in the nature of the Big Political Lie that even Ming the Meaningless can be heard calling upon the people to address POLICY not PERSONALITY; an instinctive diversion from the awful truth?

    Assuming world money is now being 'mended' by strangely motivated individuals (some blagging, others manipulating, few if any, altruistic and competent) it will end badly.

    There are good ANIMAL reasons why leaders are self-serving. Our collective perversity is that we are too indolent to address what we know.

  • Comment number 6.

    Great stuff PM. This is the sort of insight that makes your blog essential reading for those of us who find economics overwhelming at times like this. I love your politics stuff too. The BBC is lucky to have guys like you and Pesto on the team.

  • Comment number 7.

    Well, a great armour plated juggernaught of a global economy it is. Yes, it's got quite a few scars but it plunders along regardless. All the while banking on picking up speed (growth) to outrun nature's big guns. The faster it tries to go, the faster the plunder of the very resources it feeds off (soil, water, coal, gas, oil).

    This juggernaught is not just a speed junky but an acceleration junky. The speed bumps in the road have been put there for a reason. Sure the parasite will have a nice life feeding off the host - but it can't last forever.

    We need to learn how to live in equilibrium with our natural environment, and that will mean slowing down our tank and climbing out from behind the armour plating.

  • Comment number 8.

    I feel we have reached the point where the situation needs to be redefined. What was a banking crisis, has become a fiscal crisis which has transformed into a political crisis which has in some places already exploded onto the streets. For the moment the anger is just ritual opposition anger which has yet to become visceral.

    We can't go on like this as it is apparent that there is never going to be enough money in all the world to assuage the debt markets as quite simple there is far too much debt. For as long as those debts are there the crisis will prevail and the much desired economic growth will not manifest.

    So the debt has to be sorted rather than deferred. The debt cannot be resolved as it stands so it has to be redefined perhaps through international agreements to mitigate its effects. There are a number of ways of resolving this issue such as debt jubilees, swaps, consolidations and write-downs among others. We need to get cunning rather than allow ourselves to be driven by fear.

    As for those who are trying to profit from this situation they need to understand that they will need a stable government wheresoever they want to settle and count their gains. Such a place cannot exist within an unstable political and economic environment. If they are not careful the chaos from which they seek to profit will eventually consume them.

  • Comment number 9.

    Guys please can somebody answer to the following question. To whom do all countries owe money, i read about debt but i do not read who is asking for his money? This debt is so unspecific to me please it would be very helpful if somebody did the trouble and explain to whom does everybody owe money.

  • Comment number 10.

    "Big states have bailed out little states and will demand reforms that change the lifestyle of people in these states forever. "

    Don't you think it's worth balancing your analysis to reflect the fact that if the big states didn't bailout the little states, the lifestyle of the people in those states would be in for an unpleasant change in any case?

    Consider this: "The obstacles to default would be the Greek banks, which would become insolvent overnight, the Greek pension funds and of course ..."

    from here, a post which also contains links to some good research about how Greece might structure its default

  • Comment number 11.

    I'LL PUT MONEY ON IT (#9)

    You won't get an answer - at least, not one that makes sense.

    While everyone has confidence that the Emperor is finely dressed - HE IS.

    HomSap evolved to cope with a very different world. We will be OK when the ice returns. http://www.colo-earthfriends.org/400000yearslarge.gif

  • Comment number 12.

    # 9 Alexandros

    At the end of the day the workers owe the capitalists.

    The capitalists own the banks the workers owe the banks.

  • Comment number 13.

    #9 Alexandros: countries borrow by issuing bonds. Like an IOU but it pays interest. Who buys them first is not the same as who then holds onto them - because they can be bought and sold. But in general they are both bought and traded by pension funds. Why? Because the interest, though normally low, is a) guaranteed and b) in the same currency as the people who are receiving the pensions. Also some investors like bonds - aka "fixed income" - because they form a bedrock for an investment strategy.

    So the countries owe money to public and private pension funds, effectively, and to other investment funds. However because the bonds are traded, they can also become the objects of speculation - people can buy and sell insurance against the debt not being paid. Is that clearer?

  • Comment number 14.

    See my comment to your post on 05 May re: decoupling of Eurozone to a hardcore. Keep an eye on the ECB aspect. If the ECB takes bonds onto its balance sheet, governments or Euro-banks will have to indemnify the losses of those from acquisition price to face value. BEAPFF Ltd made an £18bn contribution to PSND last year on QE gilt purchases.Taxpayer pays in the UK. I heard this morning that ECB want to sterilise purchases by selling other assets, rather than print money.Germany doesnt want the inflationmary afterglow. Again, watch out for who inmdemnifies the losses..?

  • Comment number 15.

    So who's got all the money? Let's address that one, take it back - and then we would be sorted.

    Here in this country, we might be hanging around waiting for toffs to divide the spoils, but when it comes to action and cuts, there will actually be very different ideological choices - as with everywhere else across Europe.

    The choice between 3 'peas-in-a pod' parties doesn't meant that there are not other choices of political direction - or that people won't fight for them.

    Certainly further EU integration is not going to be flavour of the month.

    Interesting times

  • Comment number 16.

    #9 "Just follow the money"

    There is a silent war taking place right under our noses and it works like this:

    First, gradually ratchet up the levels of personal, corporate, provincial and sovereign debt. This has been expertly done in such a sublime manner that we almost don't realise it is happening (see how effective the principle of student loans is at conditioning adults to accept debt peonage at an early stage). Peter Warburton's "Debt and Delusion" is a fantastic expose of this part of the strategem which has taken place over the last 30 years or so.

    The second part of the ploy is to siphon off the profits. Again, this has to be done very carefully so as not to create too much attention. How can it be possible for the financial sector to still make huge profits and payouts to staff, even though major economies are creaking? Well, if you're making a cut from trading then you lose sight of whether its on the upside or downside. The direction that the REAL economy is heading is irrelevant – the important thing for them is to make the right call about where it is heading (Paul has implicitly acknowledged this by saying that many Bonds are traded on the secondary market, and therefore are not likely to be held for long – the investors in UK Plc are not holding the debt long term, they only care about the short term ovements and this requires reading the sentiment of other investors – see Keynes' infamous beauty contest remark).

    As Paul says at #13, our own money (e.g. pension funds) is being used to prop up our economies’ debt problems. This is just a game of financial pass-the-parcel using our own money! The real trick is to be "in on it" by treading a fine line between creaming the profits while you can, and also making sure you don't get caught with your pants down when the music stops.

    This is the very embodiment of "every man for himself", hence the pro-individualism mindset that is perpetuated by the Neo-liberal project (e.g. Thatcher / Reagan). This provides the moral justification for the overt wealth transfers and concentration of power and wealth.

    Most people don't like being taken for a sucker, so when they find out this is what has been happening, it will get very ugly.

  • Comment number 17.

    Excellent post as usual Paul, Wolfgang Münchau says the same thing only he's much more punchy with it: http://is.gd/c2tPP

    I was thinking about where the risk had been transferred to this morning as I walked to the bus. Historically this would now become a currency crisis, but given that this is a monetary union, I'm guessing politics is a good an analogue as any.

    The way I look at it, as Münchau says the problem is essentially one of solvency, longer term the debt is not sustainable, Greece will hit 150% of GDP in two years. The only way they stand a chance is to restructure the debt. Todays Lex has a good graph, (FT premium content only) which shows that Greek bond holders would need a 40-50% haircut to give Greece a chance, then it would need growth & spending.

    If the Greeks, (and by extension the Irish, etc.) were to do an IMF sponsored restructuring, then the ECB would have to absorb the bonds, take the loss, and support the banking, insurance and pension systems that would need recapitalising.

    I still think that Greece is not the issue, they have a clear path, what it needed is to pre-emptively restructure Portugal, who's primary export market is Spain, and who's bond base is small, then you could concentrate on Spain, and Italy.

    Spain is a mess, it's labour market is in need of reform, the banks and cajas are massively exposed to a residential & commercial mortgage bust, which has yet to run it's course, not to mention the dire state of private household & business finances. Only once you've dealt with that and disinfected with sunlight what is currently hidden, can you realistically hope to restructure Spanish debt IMO.

    The real eye opener for me yesterday was an infographic in the weekend FT that showed the size, scale and spread of Italian debt. It dwarfs Spain by at least 2-3x

    If you're looking for political risk, then more governments than there have been years since the second world war, says to me that Italy is going to need to go on a diet, and be restructured by adults, since they've cleanly proven that they can't do it themselves. The industrial North and the rural south have been at loggerheads for years about this and it needs a resolution.

    I suspect like Münchau, that once the euphoria wears off, the pressure will be back on, short of a proper fiscal union on a stable footing, this is still a one way bet.

    Giving a man a fish will keep him alive for only so long, re-educating him to fish responsibly that's another matter IMO.

  • Comment number 18.

    every failed philosophy needs to be 'bailed out' with some kind of intervention.

    the current failed philosophies around at the moment are Adam Smith [the market is the best arbiter of a nations strategic interest because it is fully informed etc and that self interest is the best 'regulator'], the EU/EMU philosophy that has never once passed an audit, the wall st philosophy that one has no need to be morally responsible when making money and the daddy of them all that philosophy [not the dead university elite sport type] is not important and is irrelevant.

    when people get their philosophy wrong they need to be bailed out or people die [iraq]. All acts flow from a philosophy of some kind so its study should be placed first in the minds of the guardian class.

  • Comment number 19.

    So who thinks adding more debt to debt is the answer ? Is there any talk of getting rid of toxic derivatives (voodoo stuff) breaking up banks that are too big to fail and getting back to what true value is ? If the answer is no, then the can has been kicked down the road and will be collecting more insanity.

  • Comment number 20.

    16 Hawkeye_Pierce

    An interesting post that seems very plausible.

    You wrote...

    "This is the very embodiment of 'every man for himself', hence the pro-individualism mindset that is perpetuated by the Neo-liberal project (e.g. Thatcher / Reagan). This provides the moral justification for the overt wealth transfers and concentration of power and wealth."

    -----------------------------

    "Every man for himself" could translate to "Caveat Emptor".

    -----------------------------

    "Pro-individualism mindset that is perpetuated by the Neo-liberal project (e.g. Thatcher / Reagan)" ...this was disguised as female/civil/human rights legislation in order to atomise modern society and break up the family unit. This all started well before the Thatcher/Reagan era btw. It also revealed a lot about Blair's secret motives when he went on record as saying that the UK's human rights legislation was his greatest accomplishment/legacy...for which he is being handsomely rewarded.

    -----------------------------

    "This provides the moral justification for the overt wealth transfers and concentration of power and wealth."...ah, the essence and justification of the "trickle-down-economy".

    -----------------------------

    I seem to remember another prominent poster to this blog making similar observations....who, unfortunately, is not so prominent anymore.

    Bashing heads on brick walls must have been their problem.

    It's good to see that others also understand the ulterior motives of our political elite that are currently held within the pockets of the financial oligarchs that own the banks.


  • Comment number 21.

    Well done (again) Paul, a beacon of well informed sound reason unfettered by vested interest and enhanced by your tenacity (as shown in your video clip yesterday).

    So the George Orwell moment is nearly here, will the people vote for the acceptance of 'Big Brother' or not?

    1984 was a warning, an extension of the dynamic he could see in his time taken to its extreme conclusion if left unchecked. We are at the tipping point of that dynamic now.

    It was impossible for George to see what the alternative reality may be, he appeared too early in the time line for that, all he could do was warn about where it could go.

    That is no longer the case, the alternative vision is now available but is suppressed, it only lives within such fringe charitable organisations like the New Economics Foundation.

    Someone had better go on a perpendicular Journey to George Orwell now and present the alternative such that the warning does not become the reality.

    Or is Big brother already too strong?

    Judging by the headlines in the Daley Mail recently and the ownership profile of the media in general the latter is the case.

    The exception being the BBC.

    I hope.

    good Luck.




  • Comment number 22.

    The loss making (large current account deficit) countries have just had their overdrafts extended for another one to two years. This will give them time to either:

    (i) Restructure their operations to bring them back into profit; or
    (ii) Continue making uncontrolled losses for another two years.

    Which is more likely?

  • Comment number 23.

  • Comment number 24.

    Regarding the point that big states are bailing out little ones in the euro area, isnt it more the case that the problems of the constituent parts are being made the shared problems of all by using new BORROWINGS with the risk mutualised across the EU. This appears to be all revolving on new money borrowed from the markets. The Commission fund is loans raised on the markets with a guarantee from EU funds ( how much risk is UK exposed to here?), The Special Vehicle Fund is loans raised on the markets with Eurozone country guarantees. They are borrowing using the Federal principle to repay bad loans made to the States. One step closer to a real Union. No wonder the Commission core looked pleased.No wonder the markets are happy - its a EU Federal guarantee and the bond markets have a new Super-borrower! Let's stop talking "bail-out"!

    So, the losses will also be mutualised across every country. So, the principle of sovereign default is being mutualised away with private taxpayers ultimately taking the strain.

    What is the UK's exposure? Let's know where we stand, please.Osbourne and Cable, please wake up.

  • Comment number 25.

    #19 flicks

    Just came across this clear bank reform manifesto from NEF:

    http://neweconomics.org/press-releases/party-leaders-must-face-down-banks-to-save-economy-say-think-tanks

    Not fully looked through it yet, but it does appear to contain all the key reforms needed to tackle the casino gulag economy:

    - Seperate retail banking from speculation
    - Break up the financial cartel
    - Introduce a financial transaction tax (Robin Hood / Tobin Tax)
    - Better regulation (reign in the off balance sheet - shadow banking system)

    Shame NEF only released this about a week before the election. Not quite sure what we can do about this, apart from each of us asking our (newly elected) MP where they stand on each of NEF's points. If they brush you off, just remind them that they might be up for re-election in a few months time!

  • Comment number 26.

    #21 Jericoa

    Maybe it was Huxley who was closer to the mark, rather than Orwell.

    Social critic Neil Postman in his book 'Amusing Ourselves to Death' compares 1984 with a Brave New World in which he writes in the introduction:

    "What Orwell feared were those who would ban books. What Huxley feared was that there would be no reason to ban a book, for there would be no one who wanted to read one.

    Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egoism.

    Orwell feared that the truth would be concealed from us. Huxley feared the truth would be drowned in a sea of irrelevance.

    Orwell feared we would become a captive culture. Huxley feared we would become a trivial culture, preoccupied with some equivalent of the feelies, the orgy porgy, and the centrifugal bumblepuppy."

    (Courtesy of a recent blogger on Steve Keen's Debtwatch)

    P.S. Agree with you about NEF. One of the few policy bureaus with an intellectual and moral compass pointing in the right direction. I hope we hear more from them in 2010.

  • Comment number 27.

    UNITS OF MONEY AND SUB-ATOMIC LOCATION (additional to #11)

    It seems pretty clear that one 'sub-atomic pound' can appear to be 'equally' in the account of an infinite number of investors, right up until SOMEONE LOOKS TO SEE! At this point, the probability equation collapses and all but one account are empty.

    If you think you own a cat, do not look too closely.

  • Comment number 28.

    In ancient Rome there was a periodic tendency for debts to spiral and become unpayable. These crises were always accompanied by political crises, and often civil war and murder. Of course formal enslavement for debt was a part of this equation.

    The common solution, from the first plebeian succession of 494BC to the proscriptions of the late Republic, was some form of partial repudiation of the debt mountain, in order that the state and society could start to function again. In the Empire, debasement of the currency (inflation) became the chosen fiscal remedy, but that is simply a different kind of repudiation.

    Two thousand years have gone by and our financial system is no more stable. We need a new financial model which does not permit our means of exchange to be a commodity both subject to speculation and misuse as an economic attack weapon.

    Sorry to bore you regulars but we have to look both at Douglas' Social Credit model and Frederic Soddy's ideas on Virtual Wealth for inspiration. There are modern developments of these ideas too.

    http://en.wikipedia.org/wiki/Social_Credit

    http://en.wikipedia.org/wiki/Wealth,_Virtual_Wealth_and_Debt

    I particularly like this quotation from Soddy:

    "Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era."



  • Comment number 29.

    @27 barrie

    Always interesting and amusing. If you think he speaks in riddles, look here for the explanation:

    http://en.wikipedia.org/wiki/Schr%C3%B6dinger%27s_cat

  • Comment number 30.

    I do not envy Mason as he tries to workout what the market will be when his programme airs later.

    As I type this at 16:00, the euro/us dollar market has now dropped right back down past 129 and wiped out much of today’s gains.

    One notes with wry amusement as the realisation dawns on the world of politics that no underlying change to the worse Euro-zone economies has actually taken place and that they still owe vast amounts and have little in the wings to help them pay that off other than by helping to pauperise their neighbours too.

    If those same earnest leaders of the EU had instead thrashed out a way to make Greece et al into profitable, productive and effective nations then no doubt the markets would reward them with a more favourable view but the arrogance of politicians often defies rational explanation. I suppose they believe that because they were voted in by their electorates and are surrounded by yes men and other politicians that they are somehow in charge?

  • Comment number 31.

    We are already in a deflationary depression worse than the 1930's and it will last until around 2016 no matter what politicians or anyone else does. They can only tinker around the edges.
    In the end, the economic waters will find their own level no matter how many different fingers are put in dykes.
    Meanwhile individuals must find a safe home for their cash and wait for the bottom when everything will be worth 10p in the £, and try to keep clear of civil unrest, crime and possibly war.

  • Comment number 32.

    very intersting analysis as always. Surprised however there isn't more about whether this package is something of a bluff. Do you really believe German people will swallow such drastic action?

  • Comment number 33.

    #25 - Thanks for the link

    "Shame NEF only released this about a week before the election."

    Janet Tavakoli got at all this more than 10 years ago. Why didn't anyone listen and act - she sent copies to all those in power and relevant of the time? But Clinton allowed all the loony derivatives - mistake of the century ? No that has to go to Hitler and/or Stalin.

    What is the point in dishing out fines (massive though they may well be - Goldman Sachs) and then carry on as usual ? Why cant the whole derivatives delusion thing be dismantled ? Surely it has to be both - loony derivatives killed off and breaking up banks.

    "they might be up for re-election in a few months time!"

    That would focus minds. Personally I say take your money out of banks and buy real gold. But I know people will not do this.

  • Comment number 34.

    @1. DebtJuggler who wrote: We are all just living in the greatest Ponzi scheme of them all. Madoff...eat your heart out!

    When I first heard about Madoff I couldn't understand what the difference was between what he did and what the banks were found to be doing except for one thing...Bernie Madoff was just one guy and 50b; its the entire banking fraternity who have allllll the cash convoluted the ponzi scheme to the point where we are all going to have to pay now. WHY IS MADOFF THE ONLY ONE GOING TO JAIL!

    AND... why are we beholden to these credit ratings agencys and the markets? Do we still have AAA rating because they think our 'political class' have the ability to force us all to swallow all the crap coming down the pipe?

  • Comment number 35.

    #27 "If we don't peek in to the box we can carry on the fantasy"

    Whereas he who opens the box kills the cat!!

    http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/03/sterling_panic_cage_fight_mark.html#P93140503

    I wouldn't want to be in the politicians shoes at the moment. Maybe all this plotting behind is closed doors is about making sure that they don't get to form a Government:

    "After you", "No, I insist, after you, sir!"

  • Comment number 36.

    #33 flicks

    It's not just Janet Tavakoli, in 1998/9 Brooksley Born was actually in a position to float the idea of regulating derivatives whilst she was head of the US CFTC. Watching PBS's "The Warning" you can see how quickly and viciously she was quashed:

    http://www.pbs.org/wgbh/pages/frontline/warning/view/

    And not on the grounds of genuine intellectual argument, but Larry Summers' "13 bankers" threat and a senate hearing ambush.

    Meanwhile, during the current economic fragility (i.e. slow death for the masses), GS can make a trading profit every single day of the year:

    http://preview.bloomberg.com/news/2010-05-10/goldman-sachs-has-first-perfect-quarter-without-any-daily-trading-losses.html

    Sheer skill and talent, or "the hand of God"?

  • Comment number 37.

    I think there is an important issue about where we are in the cycle. Lehman's happened as the world was already slowing down/entering recession. It was the last hooray for unadulterated neo-liberalism and showed how a dysfunctional ideology could massively indeed qualitatively deepen an end of cycle slow down.
    Now the world is coming out of recession, it is in the process of recovery and most of the indicators of the world economy, like JP Morgan's composite for example
    [Unsuitable/Broken URL removed by Moderator]

    show that it is a very strong recovery. Indeed according to some sources, like trade monitor

    http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

    by the Spring, that is now, given that the dataset is two months old, industrial production and trade will have recovered their entire fall. But importantly, driven by the emerging markets in general and China in particular.
    A collapse of the Euro caused by a failure to act on behalf of the ECB could have of course thrown the economy back into recession. But not least because of the example of Lehman's they acted decisively and in so doing massively accelerated the pace of European integration.
    Does it matter if the Greeks eventually default on their loan? Probably not in the medium term, and I would guess that rescheduling is pretty near inevitable. But so what? By then the bail out will have done its work, the recovery will be secure and we'll enter a new and probably very strong upturn.
    (Holds breathe and waits for the inevitable collapse ;-))

  • Comment number 38.

    #26 Hawkeye

    Thanks for that response, given me a different perspective, very good, much appreciated.

    I would not put such a dividing line between the two works though, to an extent both of the dynamics are in play I think, I know that seems slightly paradoxical but that is often where much of the truth lies anyway (see Barries post 27 which I loved by the way - at its core everything is the same as expressed by quantum mechanics and my personal favorite Hardys paradox - recently proven). As Buddha said 'if you could see the truth of a flower (it all) you would cast your head back to the heavans in laughter' I am not there yet but I definitely feel a chuckle comming on.

    Huxley is pehaps the more relevent scenario agreed, but it is the choice element with 1984 that resonated more with me in terms of the voters 'choice' to come inspired by PM post (the ultimate decision on the bail out super monetary state creation being the choice of voters).

    If big brother makes you suffer enough do you willingly, in the end run into his embrace to relieve the suffering? Is that not how big brother is born?

    Is Huxleys vision in the end, resolved by running into the arms of big brother?...see what I mean...or am I just babbling out a meaningless stream of consciousness as usual!!


    I dont know the answers but I am fascinated by the questions.

    I can wait to get home and read some more posts..good stuff this.

  • Comment number 39.

    #34

    ''AND... why are we beholden to these credit ratings agencys and the markets? Do we still have AAA rating because they think our 'political class' have the ability to force us all to swallow all the crap coming down the pipe?''

    Makes you wonder what the 'A' stands for doesn't it!!

    We can swallow what comes down three pipes at once.... impressive.

  • Comment number 40.

    #36 - Yes it was the women who brought the truth, but the affinity fraud of the Ponzi had Greenspan as king pin. When you look at Browns risk based regulation you can see where his delusion came from - truly vile . I don't believe anyone who has basic understanding of some of these derivatives could persist with Greenspan's economic philosophy.

  • Comment number 41.

    OK, so the EU is now one big mutual fund of dubious value and dodgy risk, ownership and responsibility.

    Also, you seem to imply that this mutual fund is holding as its chief asset a possibly "virtual" bond backed by the taxes of whichever EU governments step up should a collapse occur. To be determined. Or dodged.

    By "virtual bond" I am referring to a marvelous Wall Street invention. First,one of the big 6 US banks created and traded a cleverly incomprehensible bond (CDO) backed by a confusing bundle of cash flows such as mortgage payments (the ownership of the actual mortgages being left a bit legally vague). Then that fabulous bank created a virtual version of this bond/CDO, with the virtual version backed by absolutely nothing! Clever graduates of our best universities, that lot. Then they sold the virtual bonds/CDOs (often created in multiples). Profits galore, with losses/risks transferred to US Treasury and its worker bee taxpayers. No end of cleverness.

    Is this virtuality (as opposed to virtue) what the EU is up to?

  • Comment number 42.

    Consider this from Morgan Stanley: Enjoy The Sucker's Rally, The Euro Is Still Toast http://bit.ly/9c9xHB

  • Comment number 43.

    Paul Krugman is worth a read as always:

    http://krugman.blogs.nytimes.com/2010/05/10/shock-and-uh/

    http://krugman.blogs.nytimes.com/2010/05/07/a-cross-of-gold/#more-9221

    http://krugman.blogs.nytimes.com/2010/05/07/hung-over-in-britain/

    The second article, about the history of monetary union in the US, is necessarily incomplete. Galbraith pointed out in "Money - Whence It Came, Where It Went" that because of the proliferation of banks in the West, there was plenty of dodgy paper money in existence, which served the local economies well, but could only be traded at a discount in the hard-money East of the US. So, in effect, there were actually several currencies in the US in the mid-19th century.

  • Comment number 44.

    The Mask of Anarchy by Percy Bysshe Shelley.


    following the

    Peterloo Massacre.

    of that year. In his call for freedom, it is perhaps the first modern statement of the principle of nonviolent resistance.

    "Stand ye calm and resolute,
    Like a forest close and mute,
    With folded arms and looks which are
    Weapons of unvanquished war.
    And if then the tyrants dare,
    Let them ride among you there,
    Slash, and stab, and maim and hew,
    What they like, that let them do.
    With folded arms and steady eyes,
    And little fear, and less surprise
    Look upon them as they slay
    Till their rage has died away
    Then they will return with shame
    To the place from which they came,
    And the blood thus shed will speak
    In hot blushes on their cheek.
    Rise like Lions after slumber
    In unvanquishable number,
    Shake your chains to earth like dew
    Which in sleep had fallen on you-
    Ye are many — they are few"

    "Men of England, heirs of Glory,
    Heroes of unwritten story,
    Nurslings of one mighty Mother,
    Hopes of her, and one another;
    What is Freedom? Ye can tell
    That which Slavery is too well,
    For its very name has grown
    To an echo of your own
    Let a vast assembly be,
    And with great solemnity
    Declare with measured words, that ye
    Are, as God has made ye, free!
    The old laws of England--they
    Whose reverend heads with age are grey,
    Children of a wiser day;
    And whose solemn voice must be
    Thine own echo--Liberty!
    Rise like Lions after slumber
    In unvanquishable number,
    Shake your chains to earth like dew
    Which in sleep had fallen on you-
    Ye are many — they are few"

  • Comment number 45.

    Just to balance matters

    Blythe Masters -

    http://kvp.expressen.se/polopoly_fs/1.1089367!slot100slotWide75ArticleFull/3447786819.jpg

    Mother of Credit Default Swaps

    http://alexmasterley.blogspot.com/2009/08/blythe-masters-of-universe.html

    A women invented the weapon of financial destruction, men defended and implemented it and other women exposed it.

    For those of a visual bent like me and budding TV presenters, please note how the strong straight line diagonals of her hair emphasize her image power by directing and concentrating your eye to hers.

  • Comment number 46.

    how long before the EMF, EU and even the Fed have to ask Beijing if they can spare a dime? Seems the world always needs a bigger and bigger bank of mum & dad.

  • Comment number 47.

    I read in the FT today the bets against the Euro outnumbered bets in its favour by a factor of 4 to 1 on the Chicago Merc Exchange. The Europeans being the main advocates of shackling the hedge funds, it looks like even the EU isn't big enough to risk criticizing hedge funds. No wonder British politicans don't want to criticize hedge funds. I've not seen a good analysis anywhere of how the Greek debt exploded over the last 3 years. Did the Greek gvmnt have to bail out Greek shipping interests as trade collapsed in 2008/9? Did the tourist trade flounder? Anyone read any detail on this. I'm fed up of reading stuff about the Greeks being profligate and lazy as though this is some sort of comprehensive explanation of the situation.

  • Comment number 48.

    SKY News' Kay Burley harasses a pro PR spokesperson in the name of democracy and journalism.
    http://www.youtube.com/watch?v=ELJh2bTK1ew

  • Comment number 49.

    In early May, 1842, a further petition, of over three million signatures, was submitted, which was yet again rejected by Parliament. The Northern Star commented on the rejection:

    Three and half millions have quietly, orderly, soberly, peaceably but firmly asked of their rulers to do justice; and their rulers have turned a deaf ear to that protest. Three and a half millions of people have asked permission to detail their wrongs, and enforce their claims for RIGHT, and the 'House' has resolved they should not be heard! Three and a half millions of the slave-class have holden out the olive branch of peace to the enfranchised and privileged classes and sought for a firm and compact union, on the principle of EQUALITY BEFORE THE LAW; and the enfranchised and privileged have refused to enter into a treaty! The same class is to be a slave class still. The mark and brand of inferiority is not to be removed. The assumption of inferiority is still to be maintained. The people are not to be free.

  • Comment number 50.

    @41 Citizen Why who wrote "OK, so the EU is now one big mutual fund of dubious value and dodgy risk, ownership and responsibility." I agree except with one minor alteration; it has become a hedge fund and not a mutual fund.
    Thanks

  • Comment number 51.

    @42 I read your links - thank you - very illuminating. The world community rescued these b******s when they were on the ropes, but now they are in attack mode again.

    It's one thing to posess WMD, financial or otherwise, but it's another thing to use them. Then we get into the realm of (financial) crimes against humanity, (as I think Jericoa dubbed them). Time for some financial Nuremberg trials: we could call them the Bilderberg Trials? Let's sentence the guilty: not to death, but to live in a council tower block with no job and the basic dole or equivalent thereof in their country of origin.

    Also, never mind going begging to the Chinese - they've been very good at this game too. It's time to stop playing it. Repudiate all debts and financial instruments, but start a new credit system like the old Japanese "Koku", based on the productive capacity of a country. Then if a country can't meet its needs, it has to consume less an/or produce more.

    " simples! "

    (NOT!)

  • Comment number 52.

    @49 Henry James

    Carry on with your posts please - I like them. :-)

  • Comment number 53.

    The myth of the EU is that it is some form of charity an Oxfam for smaller countries, when the reality is that it is nothing of the sort. One of the reasons Greece went bankrupt first is due to this chart

    http://news.bbc.co.uk/1/hi/world/europe/8036097.stm#start

    Someone will then say but it receives around 8billion Euros from the 4 billion it puts in. But the extra surplus is for CAP. Without agricultural produce from the southern states of Europe the north would starve. Industrial products have a higher net value than agriculture much in the same way as a bankster has a higner net value as a teacher. but if you just sell fridges without being able to put food in them doesn't increase the net value of the fridges nor can you sell them. Hence the current crisis like those that went on before them is about extracting more for less from the agricultural south of the EU. Its a win win situation, Greece appears as the cause of the crisis and Germany appears as the benefactor. I know someone who will be laughing in his grave....

  • Comment number 54.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 55.

    Printing money can expand an economy. case in point: 19th century USA.

    As Sasha Clarkson pointed out, there were several currencies in use in the US in the 19th century. Each state printed its own currency. Then counterfeiters could easily and safely print more, thus multiplying the money supply.

    Each state enforced the law of counterfeiting only against counterfeits of its own currency. Thus counterfeiters could, and did, produce a state's currency, without fear of arrest, in another state, for instance New York Currency in Pennsylvania. Printing state money was not a federal offense, so the federal government did nothing.

    All this expansion of the money supply through counterfeiting fueled greater commerce and greater economic expansion.

    Perhaps Al Queda or some other shrewd operator is already busy counterfeiting Euros in Indonesia or Somalia or Pakistan, in preparation for buying influence throughout the EU.

  • Comment number 56.

    ' ... "special purpose vehicle" - a term we all remember from Enron, Lehman and the London Tube PPP - gives the game away. Like all SPVs ...'

    So that'll be pronounced "spivs", then.

    Can't help noticing that there have been a lot of prisons built instead of houses, the police have been acquitted of various assaults and killings, "kettling" and other fairly brutal means of repression have been introduced regarding peaceful protest, and politicians such as Frank Field warn ominously of "the mob" who have "already attacked the house of a banker" (Fred The Shred). Is there something we should know?

    I look at Athens and post-Katrina New Orleans and think, "That's us next".

  • Comment number 57.

    Since the crisis begun with the Lehman brothers everybody says that loses money. So my question is: Everybody loses money or 90% lose money and 10% for example gain money? I mean that in physics for example energy is not lost maybe it changes or it transfers but it is not lost, does it happen the same with money? If it does then who is gaining the money? He is probably the responsible for the crisis. If the money are lost, how is this possible i do not get it, or is it just the interest that it is lost? And if it is just the interest why is it so bad to lose it, maybe it is but it should not be the end of the world.

  • Comment number 58.

    #57 Alexandros

    Assets have nominal prices that vary.
    For example, your house might be worth £200k today but £100k tomorrow.
    The same applies to shares & other financial investments.

    So in this sense money (value) can just disappear.

    In the case of Greece, the banks own Greek government debt.
    This debt has a value.
    If there is a risk that they don't get the full value (nominal amount plus interest) then they lose money.
    So to ensure the banks don't lose money the ordinary Greek must work harder & longer & earn less.
    Greek workers are paying for the bankers & those with large sums invested (some very rich Greeks as well) extravagent lifestyles.

  • Comment number 59.

    This comment was removed because the moderators found it broke the house rules. Explain.

 

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