The Next Big Derivative Market

The hopium is being smoked long and hard here….

European officials are outlining a rescue plan that may include deeper investor losses on Greek bonds, higher bank capital levels and increased firepower for bailouts and the International Monetary Fund.

The plan’s elements emerged as finance ministers and central bankers from the Group of 20 began talks in Paris, seeking ways to end Europe’s two-year sovereign debt crisis. Underscoring the need for action, Standard & Poor’s yesterday cut Spain’s credit rating for the third time in three years and new data showed the eight largest U.S. money-market funds almost halved their lending to French banks last month.


I love these sorts of statements.  Recapitalization of banks eh?  You mean that if I walk into a casino and gamble away all my money, someone will “recapitalize” me?  Who would that be?

Well, that would be me.  But wait – I’m broke.  I lost all my money.  So now I’m going to bail myself out?  How’s that going to work again?

This is the paradox of these “bailouts” and “recapitalizations”, as I listen to Geithner run his pie hole this morning on CNBS.  The fact of the matter is that such “recapitalizations” are in fact nothing more than a circle-jerk, as the government is simply pulling forward tax receipts and handling them to banks “on the come” that productivity and incomes will advance, making it possible to cover the bet.

This, of course, has been the game in the US and elsewhere for the three decades.  But let us remember that it is precisely the fact that we ran this crap for three decades that led us to the place we’re at now, where the housing market has effectively folded back, the consumer is being crunched under the weight of all their debt and we have been narrowing the base of those able to accept the additional leverage, with the largest remaining group over the last two years being student loans!

Yet there is still no acceptance of what happened, that it’s unsustainable — that neither government or any other sector of the economy can in fact spend on a sustainable basis more than it has available in economic surplus!

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