Wednesday, May 2, 2012
The economic poop storm isn't over yet
We've seen what the results of derivatives have done to the world economy. The head of the spear has been Portugal, Ireland, Iceland, Italy, Greece and Spain. These little financial weapons of mass destruction are still killing economies and aren't finished yet with their damage. Far from it as the other shoe is about to hit the floor. We saw with great distain how the Greek bail out went. Austerity may be a fine thing for a short term economic problem but it will never raise a nation out of a depression (and let's face it that's what this is). Why Greece was even let into the european economic community to be tied to the euro in the first place makes one wonder. They had at the time been less than honest with their books but at the time it was an atmosphere of fast buck action akin to a gold rush. Those in the know and in charge knew that Greece was not in that great shape financially at the time having entered into the newly created opaque world of derivatives, hedge funds and credit swaps. But they overlook the shortcomings and welcomed them into the Euro club.
Here's the fly in the ointment or at least a reason the mess will not be unraveled any time soon. None of these financial transactions is based on anything tangible. And they all have two things in common. They were created to get around the regulatory laws used to prevent such happenings and their purpose is to make large profits for the banks and brokerage houses that sell them. An army of highly educated mathematicians was sent out to convince ill informed retirement fund managers, city leaders, and even nuns in a convent to purchase these instruments knowing nothing about how they worked or what risks they held. Sub prime mortgages were sliced and diced repackaged and sold as an A+ investments. What was once called junk bonds was now being sold as solid gold. Entire nations bought into the scheme which like a ponzi scheme worked well until someone wanted to cash out. Then the house of cards started to fall. Greece being one of the highest exposed countries was the first to go.
What people fail to see is that the countries that bailed out Greece are in no better shape and have themselves fallen for the scheme as well by saddling their residents with higher taxes and budget cuts. We're seeing Britain as well as France and Germany those bastions of economic stability fall into recession. How we've managed to make it this far with out another major meltdown is anyone's guess because little has changed in regulating this game. We can easily see what's coming our way by focusing on the foreign markets and their condition. But don't be fooled by the rosy picture they may be touting the monster lurking underneath hasn't begun to show his face. Whether we make it to fall before the next major meltdown is up for grabs but one thing is certain the things you aren't hearing right now speak volumes about what really is happening yet no one will acknowledge the 800lb gorilla in the room until it's too late.
What was the solution? The solution was to lay the economic mess on the backs of the tax payers of every nation. We're seeing that with the austerity programs in Greece. But to add insult to injury this isn't about clearing the books and starting over again. Oh no rather than do that more debt was created such that no nation could ever hope to repay. As these weapons of financial mass destruction unravel they will take with them entire nations. It's only been in the last few months that countries like Ireland, Spain and Portugal have even begun to slash budgets and raise taxes. The end result will not be felt here for a while as we have kicked the can down the road yet again. But the effects are beginning to show on a state and local level. We're seeing tuition increases, hospitals laying off people and projects being put on hold.
How Iceland dodged the bullet:
Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.
Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.
Iceland was lucky because they weren't tied to the Euro directly. They could easily devalue their currency there by making their exports cheaper. We aren't so lucky in that we don't have as much breathing room. And whether this administration would let the banks fold rather than another bail out is questionable. Our leaders are after all owned by the banks. They didn't get to where they are without some healthy campaign donations.
I give a hat tip to anyone who can dig through and find out where the current crop of toxic investments is being sold. Find your sucker and you'll see the next cracks in the system. So far it's cost us a bit more than 7 trillion dollars for the last round of bail outs. I can't imagine what it would take to do the next round. One thing's for sure the next storm is coming and it won't be pretty.