Everyone seems to be asking repeatedly why we don’t get some sort of “solution” for Europe out of Merkel and Obama, along with The Fed.
I want to put forward my theory on this, because this much is certain — the “powers that be” certainly don’t like the prospect of a blowup in Spain.
But while these folks are many things, stupid isn’t one one of them.
The problem with an attempted Spanish bank rescue (which, incidentally, I believe would cost upward of €100 billion, and that’s just to fill the current capital hole) is that if Greece erects the middle finger it all is for naught and the funds put in go up in smoke.
There’s only one thing worse than bailing someone out who’s ungrateful for your help — and that’s to literally throw money on a fire.
And throwing money on a fire is exactly what they’d be doing right now if the Greek elections don’t go their way.
So I would not expect anything — at all — for a couple of weeks. Instead you will hear jawboning and all sorts of BS, but no real actions.
Exception: If a full-on meltdown is imminent, they’ll blow the money.
But if that happens then I’d head for the bunker, because to take the risk of simply blowing the cash, which is exactly what would be undertaken at this point, you need something that is not only actionable but imminent.
The correct solution to the problem over there (and here) is to force all the derivatives onto regulated exchanges and enforce a One Dollar of Capital standard. A huge number of these institutions (maybe most of them) would immediately fail. To bridge the gap you could then capitalize 10 new institutions through bond sales (which would be very cheap as money “ran” into bonds!) to insure the payment clearing system does not collapse.
But that means letting the Deutsche Banks and JP Morgans stand on their own feet, and if they can’t, letting them burn to the ground.
We know how likely that is, even though it’s the right move.