Good Morning to a Headless Europe

Wednesday, March 25, 2009

While my favourite bloggers that can be found in the blogroll in the sidebar have been poring justified criticism on the latest trillion-of-the-week adventure mov(i)e starring Ben Bernanke and Tim Geithner, my concerns focus on the entirely new situation within the European Union.
The resignation of the Czech government makes the EU now not only clueless in the fight of the current crisis but also headless.
Given the recent reserve in the Czech Republic towards the Lisbon Treaty, which has not been ratified by the Czech Republic, Germany, and Ireland until now, this country in the center of Europe could become a stumbling block to the Lisbon Treaty which is pushed forward by the EU who says there is no alternative to it.
While the EU is officially speechless until now, a check of the latest press releases at Wednesday lunchtime showed, prime minister Miro Topolanek had posted a few sentences by himself and the EU on the Czech's EU presidency website:
Czech Prime Minister Mirek Topolánek accepted the result of the vote in which the Chamber of Deputies expressed no confidence in his Government.
"I will adhere to the constitutional order", stated Mirek Topolánek.
According to the Constitution of the Czech Republic, the Prime Minister now has to submit his resignation to the President. The President will then decide on the appointment of a Prime Minister who will form the new government. At the moment this situation has no effect on the role of the President of the European Council held by the President of the strongest party in the Parliament.
The EU said in the same statement,
According to the treaties, the Council Presidency is held by the Member State which is represented by its competent governmental authorities under national constitutional law. The Commission has full trust that the national constitutional law allows for the Czech Republic to continue conducting the Council Presidency as effectively as it has done until now. It is for the Czech Republic's democratic process under the constitution to resolve the domestic political issues; the Commission is confident that this is done in a way which ensures the full functioning of the Council Presidency.
This development comes at a time when the EU wants to take significant legal steps to alleviate the current economic crisis, the worst in the history of the EU.
The Financial Times has the following as its top story (excerpts.)
The Czech government collapsed on Tuesday night after losing a vote of confidence over its handling of the economic crisis.
The 101-96 vote marks the end of the coalition government of Mirek Topolanek, the centre-right prime minister, as well as the effective conclusion of the already bumpy and crisis-ridden Czech presidency of the EU, which formally expires on June 30.
The initiative (to form a government) now passes to Vaclav Klaus, the euro-sceptic Czech president, who will have to name a caretaker administration to govern the country. If three attempts to form a new government fail, then new elections are called.
The difficulty in forcing new elections raises the possibility that a technocratic government will limp along in power until the next election, set for June 2010.
That would leave Prague ill-prepared to deal with the fall-out from the economic downturn, which is hitting the export-orientated Czech economy with increasing force. In a recent interview with the Financial Times, Zdenek Tuma, the governor of the Czech central bank, said the economy could shrink by as much as 2 per cent this year if the situation did not improve in western Europe.
Mr Topolanek had resisted calls to increase spending, arguing that the government did not have the wherewithal to bail the country out of the recession. However, that approach was unpopular with the left-leaning Social Democrats, and helped galvanise opposition.
The final straw was a domestic political scandal relating to accusations of inappropriate pressure to force a television station to stop a story criticising an opposition MP who had joined the government side.
Topolanek had survived four no-confidence votes before. At present the opposition Social Democrats lead Mr Topolanek’s Civic Democrats (ODS) in opinion polls.
The vote comes ahead of a visit to Prague next month by US president Barack Obama.
Are the Wheels Falling Off the EU Cart?
What's at stake now is the whole future of the EU that depends on the ratification of the Lisbon Treaty in Germany, the Czech Republic and Ireland. In Germany ratification depends on a ruling of the Constitutional Court and in Ireland the people is massaged into a yes-vote at the next referendum after they failed to vote as the EU rulers had expected. Ireland's constitution requires a referendum on such big changes in its sovereignty.
Having read the full text of the Lisbon Treaty I understand their distrust. Not entering an endless excourse on the Treaty (wikipedia) my main concern is the future target of a EU military.
No War Please, We Are Neutral Austrians
As an Austrian, where neutrality is anchored in the constitution since 1955, I admire the 200 years of peace neutral Switzerland has been enjoying and oppose any partaking in any military bloc where Austrian kids would have to die for somebody else's cause.
While the French government changed the constitution after their people said "non" and still voted for the Lisbon Treaty in parliament, Austrian government never let its people choose about the doubtful give-away of such relevant sovereign interests like justice and defense. I am therefore all the more grateful that there are still 3 possibilities to block the Treaty that had also been rejected by the Dutch people who were overruled by their own government too. If the democratic process for a less democratic Europe already started with overruling those who elected their respective governments who betrayed their will, this is certainly not a good start at all.
Will the EU Fail Again in Crisis Management?
As can be seen in the unfolding grand depression the EU had been clueless until things began to fall apart. Standing at its biggest crossroads ever the EU might regret never to have developed a plan "B" to their vision of a further centralized Europe that eats away on local sovereignty to the point where it becomes micro management by an octopus-like anonymous force in Brussels as opposed to the free market idea that should be the guideline for Europe.
Daily rises in economic hardship will not favor a European Union - I preferred the European Community which I once voted for - as national interests will collide everywhere. When there is nothing left to distribute from empty state coffers EU members will jealously watch every move in Brussels that could be to a regional disadvantage.
Cooperation could be never more valuable than now, although. The East Asian power houses begin to demand a bigger role in world politics as they watch the Western capitalist experiment failing due to the inherent problems of all systems: corruption and cronyism.
But I would prefer to see cooperation in economic and social affairs and backlist a EU military force to the last place of the EU's tasks. We don't need no more possible warlords who lead our children into death while telling us it is for our own good. Civilization has always developed best in times of social peace but never during wars. Let's put our priorities there, please. Maybe a new Lisbon Treaty with a priority on social issues would also find the nods of the 500 million Europeans that will be governed by it.
The EU may soon face the biggest problem in its history. Not only will it be clueless and headless but direction-less as well. A vacuum of political will may then result in the partial dissolution of the Eurozone first. Despite several summits the EU has not yet come forward with a plan to solve the financial and economic crisis. This is simply for the reason that any solution would mean that some EU members would have more on the plate than others in times when there is nothing left to distribute. Expect the situation to worsen with every day no solution to Europe's financial crisis is found.

This post is part of my contributions to TH!NK ABOUT IT, a blogging competition in the forefield of the EU election in June.

Austrian Economy Contracts Much More Than Expected in Q1 2009

Saturday, March 21, 2009

The Austrian economy shrank by 1.5% in Q1 2009, accelerating the downtrend after a contraction of minus 0.2% (preliminary) in Q4 2008. According to a (German Language only) press release from the Austrian central bank the negative growth figure came in much higher then the forecast of minus 0.5%. Austria faces stiff headwinds from the economic downturn in Germany, its main trading partner, and Central Eastern Europe (CEE), the backyard of Austria's economic expansion since 1990.

GRAPH: After enjoying solid growth rates until Q3 2008 the Austrian economy fell off a cliff. Forecasters are of differing opinions when Austria will return to positive growth. Chart courtesy of OeNB.
Central bank governor Nowotny said in the release,
"we expect economic activity to bottom out in the first half of 2009. The (recent) tax reform and economic stimuli should stabilize growth later."
The central bank is cautious about the short term outlook due to strongly declining export orders. Most crucial is an EU emergency package for Eastern Europe since Austrian banks have lent some €230 billion to the region, outpacing all other foreign banks by multiples. As most of these loans are denominated in Euros and Swiss Francs East Europeans confront higher payments every month due to the weakness of their respective local currencies.
EU Leaders Thumb Down Aid Package for Eastern Europe
An aid package envisioned by Austria has been rebuffed by the EU, reported the Wall Street Journal on Friday.
European Union leaders, meeting at a Brussels summit, rejected calls to expand their fiscal-stimulus policies, or to boost aid for struggling Eastern European countries.
The EU leaders said they are willing to provide $75 billion to increase the International Monetary Fund's war chest, provided the U.S. and China also pledge money. The IMF is seeking to double its resources for helping countries to $500 billion from $250 billion.
But key EU countries including Germany and the U.K., are opposed to expanding the bloc's own fund for helping ailing economies in Central and Eastern Europe. Much of that €25 billon fund ($32.7 billion) has been spent on aid to Hungary and Latvia.
Austria is under fire from all sides. The former world champion in tourism revenues fights with declining bookings while the machinery industry and automotive suppliers get choked by the problems of their predominantly German clientele.
Deutsche Bank Research compiled Austria's dire outlook in a paper released on Friday that highlights Austria's dependency on its business partners.
Due to high household indebtedness and the sharp economic downturn in Emerging Europe, financial markets have become increasingly worried about Austrian banks’ large loan exposure to this region. The strong financial and trade links with Eastern Europe, which have boosted Austrian growth over the past few years, have now become the Achilles’ heel of the Alpine Republic. Given the high importance of Germany and Eastern Europe for Austria’s export sector, the economy is highly vulnerable to the current growth weakness of these countries.
Yield Spreads Reach Record Highs
Investors worries are visibly priced into Austrian government bond prices and CDS. According to DB Research,
Financial markets have sharply re-priced the risk for Austrian government debt over the past few weeks. At times, Austrian 10-year sovereign bond spreads climbed to fresh multi-year highs of more than 130 bp vs. German Bunds. 5-year sovereign CDS spreads soared to around 270 bp and are still on par with highly-indebted Greece and only topped by Ireland. However one has to bear in mind that the CDS market may not be solely driven by default risks but also by other factors. Very recently, sovereign bond and CDS spreads have narrowed again to around 110 bp and 180 bp, respectively.
As always, a graph is worth more than 1,000 words depicting Austria's huge loan overexposure to the CEE countries. DB Research said further,
With foreign bank lending of USD 278 bn or 65% of Austria’s GDP, Austrian banks are by far the biggest foreign players in the transition economies, both in absolute terms and relative to GDP, according to the Bank for International Settlements’ consolidated banking statistics. Emerging Europe has become the most important foreign region for the Austrian financial sector and Austria the most important financier for this region. Accounting for almost 50% of total Austrian foreign bank assets, Eastern Europe clearly stands out.
Around 45% of Austria’s lending to Eastern Europe goes to economies such as Romania (USD 43.7 bn), Hungary (USD 36.9 bn), Russia (USD 22.4 bn), Ukraine (USD 14.3 bn) and Bulgaria (USD 5.5 bn).
Since all these economies are currently facing severe economic slowdown or are suffering from painful economic adjustments of past exuberance in private sector credit, Austrian banks are exposed to rising household and business loan defaults. In light of already high household sector indebtedness and a heavy debt service burden (at 30% of disposable income in some economies), there is further pressure from the high prevalence of FX household loans, not least as a result of significant domestic currency depreciation over the past few months (see chart). Overall, as a result of the large banking sector exposure the government faces relatively high contingent liabilities. Recently, Standard & Poor’s estimated the banks’ gross problematic assets at around 12-24% of the domestic credit stock, which is equivalent to approximately 14-29% of GDP. Hence, the sovereign faces potential recapitalisation costs of 2% and 5.3% of GDP in S&P’s base and worst case scenario, respectively.
DB Research Analyst Sebastian Becker concludes that Austria's debt ratios have only one way to go: up.
As a result of the global financial and economic crisis the public debt ratio already rose to 62.6% of GDP in 2008 from 61.9% in 2007 (according to the OECD) and is expected to climb further to slightly below 70% of GDP by 2010. Austria’s fiscal deficit is forecast to soar to around 4-5% in 2009/10 from 1.2% of GDP in 2008 due to rising expenditures and falling tax revenues (similar to that of its neighbour Germany).
Austria has outperformed Germany in the since 2002, experiencing swings in Germany with a 6 to 12-month delay. As Deutsche Bank has forecasted that Germany might contract by 5% this year, negative Austrian growth figures can be expected to rise further too.

Monetizing the Debt: Fed Will Buy Everything That's Not Nailed Down

Thursday, March 19, 2009

Word has probably spread around by now that the Federal Reserve is going to buy everything in America that's not nailed down, throwing another $1,150,000,000,000 lifeline at markets. (Click here to see what a trillion looks like.)
The Federal Open Market Committee (FOMC) yesterday informed the public that it will expand its dominating position in the MBS market, throwing an additional $750 billion there. The buying spree does not end there. Having arrived at zero interest rate policy 3 months earlier the Fed now hopes to control interest rates by monetizing US Treasuries equalling $300 billion. Stirring still more Bourbon in the punch bowl the Fed will also up its portfolio of agency debt by another $100 billion.
Markets rallied on the news with Treasuries shedding up to 51 basis points. Gold outshone everything and spurted more than $50 on the FOMC's news that will ultimately lead to higher inflation rates despite the FOMC statement that said,
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.
Surprisingly chairman Ben Bernanke and his troops are more worried about possible deflation despite the Fed's balloning balance sheet that will pass the $3 trillion mark this year.
Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
Latest CPI figures show a different picture. Inflation rose to 0.5% (January: 0,4%) or 6% annualized in February.

GRAPH: Gold reacted with the biggest jump seen in decades, rising more than $50 after the Fed released more measures that are designed to fuel monetary inflation. Chart courtesy of
Economists were up in arms about the Fed's measures.
Stephen Stanley of RBS Greenwich Capital said via the WSJ blogs:
The agency MBS market is close to $4 trillion, so the Fed will end up owning almost one-third of the agency mortgage market. If this was a “rigged market” (to quote one of my learned colleagues on the mortgage desk) before, what should we call it now?! … $50 billion per month in Treasuries pales in comparison to new supply. Just to flesh that point out, we project that auctions of 2’s, 3’s, 5’s, 7’s, and 10’s will total $150 billion in March. In essence, even if all the purchases are limited to 2’s to 10’s, the Fed’s program will merely be a third of the new supply (and far short of one-third of the total market, as is the case for agency MBS).
Morgan Stanleys David Greenlaw said,
Even with energy prices having flattened The Fed’s Treasury purchases will absorb a very significant portion of the amount of gross issuance that we anticipate to occur over the next six months… The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.
Bloomberg summed it up in the lead of their coverage:
By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.
I conclude nothing has changed in the Fed's perception that new fiat money will also solve this crisis. Taking gold's reaction as the canary in the coal mine markets will recognize that the Fed is on the way towards hyper inflation. As in the Weimar republic the US central bank spins up the presses to monetize the debt. At the end of the Weimar republic one percent of government income came from taxes and 99% came fresh from the printing presses.
President Barack Obama may have no other choice than to take this route as foreign investors grow wary about the capability of the USA to serve its debts and we may see less participation in Treasury auctions also for the reason that sovereign wealth funds will spend a bigger portion domestically as nearly every nation is confronted with the economic downturn. For the time being gold investments may turn out again to be the safest asset to hold.
UPDATE: says one trillion greenbacks could fund an inflation-adjusted New Deal twice over. Check out their way of visualizing what one trillion can buy and be in for a dose of reality.

I especially liked this one. Do you still say this crisis is manageable? Illustration courtesy of

UPDATE: Once you have landed here I bet you will find the post "Monetizing the Debt - Explanation for Non-Economists, Bankers and Other Laymen" both informative and entertaining.

What Does ONE TRILLION FRNs Look Like?

Tuesday, March 17, 2009

Recent media commentaries have billed trillions the new billions as expansive monetary policy has propelled money supply into hitherto unknown stratospheres and the US budget deficit has pierced the 13-digit mark.
As a benefit to nature modern-day money creation works without paper and ink. Sand turned into microchips will awake the standing armies of digitally created fiat money at the disposal of central bankers who uniformly erred about the current crisis that may turn into a collapse later this year.
One thing is for sure: There are enough FRNs around and if central bankers don't throttle money supply growth we may all end up as millionaires. That's a hundred for your burger please, madam/sir.
Check out these very graphic computer drawings of 1 TRILLION Federal Reserve notes (in 100s) at

Crunchies for Ben Bernanke

Word has it that Federal Reserve chairman Ben Bernanke breakfasts on a bespoke brand of cereal since August 2007. It has not yet been found out how many helicopters Bernanke commands in the ongoing turf war of fiat money.

Follow The Prudent Investor on Twitter

Monday, March 16, 2009

Being wary about the privacy policy of social networks like Facebook and MySpace I nevertheless cannot resist the temptations of Twitter.
With its brevity, 140 characters per Twitt, it leaves room for condensed information only.
As I read tons of websites every day I plan to post the best links in realtime when I come across that kind of anomalous news that shape my perception of markets and global policy.
Go here to my Twitter Homepage to subscribe to my feed in order to read the most important topics ignored by MSM.
To follow Twitter I use the TwitterBar for Firefox as a most convenient add-on.

Capitalism, Socialism and Democracy - and Common Sense

Sunday, March 15, 2009

Monitoring financial and political news has become a very depressing task recently.
While the USA enjoyed a short fairy tale period between president Obama Barack's election and his inauguration, the staccato of catastrophic news has accelerated into a crescendo of crisis since January. Financial TV gushes with appearances of the global top brass, united in the goal to fend off the consequences of 22 years of highly expansive monetary policy, free market gospel and excessive leverage on public and private levels, but clueless how to achieve this.
Europe fares still worse. What looks like a nosedive in American economic activity evokes images of a freefall in the old world at close range.
Overindebted consumers, now also fearing the increasing possibility of losing their jobs and tightening the grip on wallets thinned by rising public service fees, overshadow the progress in the East.
China's exports hit a roadblock in January with no signs of an improvement and India has to sober up from a credit financed shopping spree, now that the demand for online personal valets is on a steep decline and endangers many a call centre.
Daily closures in the Western hospitality industry clearly mirror a new mindset of frugality among consumers.
Eastern Europe is the ticking time bomb in the backyard of the Eurozone. The region currently wakes up to the devastating effects of forex borrwoing to finance consumer goods. Now the local currencies languish close to their record lows.
Major forecasters offer no relief. The World Bank, the OECD and many other institutions expect the global economy to shrink for the first time in ages. Deutsche Bank recently warned that the German economy could shrink an unprecedented 5% this year. This may still be optimistic given the recent halving of German machinery orders.
"They" Don't Have a Clue
While first being overwhelmed by the fastest contraction in economic activity in recorded history, hanging on the lips of central bankers and politicians in order to get an idea about the future, I have rescinded from this time-wasting procedure for a simple reason. "They" don't have any clue how to handle the rapid disintegration of the world's financial fiat currency system.
Memorializing financial history the current crisis finds multiple precedents. All economic crises in the western hemisphere have rooted in excessive monetary expansion that is only possible under a fiat currency system.

One cannot blame politicians for their preference of a monetary system that allows to catch voters with perks and benefits that will have to be paid for by future generations. But how could I cast a vote for them when they ultimately hang on to economic theories that have never proven to work in the last 4 centuries??
It is a fact that the purchasing power of all unbacked fiat currencies has always been wiped out by inflation. Floating currencies don't float. They only sink at different speeds.
This leads to the ultimate crux in the enduring discussion how to mitigate and solve the crisis. This is not a problem of the acting persons but a problem of the domineering theories where the supremacy of fiat money does never get questioned in the first place.
The global big-wig elite comprised of central bankers, bankers and CEOs, finance ministers and other government members, clings on to a bizarre mix of empty free market phraseology that stands in deep contrast to recent nationalizations on both sides of the Atlantic, and Keynesian attempts to jumpstart the economy with new debts on top of those that have become unbearable already, leading to the current disastrous environment.
Plunging stock markets may be a good indicator that investors correctly mistrust public promises that those in charge have a plan other than to echo the fallacies of John Maynard Keynes, who preached anti-cyclical government intervention to revv up the economic engine. But they conveniently forget the other part of Keynes' model. Keynes also talked about government savings in the fat years in order to finance the deficit spending periods.
At the same time the government's share in the economy rests well above the 40% threshold, hardly a proof that capitalism has developed according to the slogans of promoters from all political camps.
Conservative and progressive political camps apply the old standard fare. Hypocritical calls from the right that demand to let markets work their way through this crisis of epochal proportions are nothing but empty words, given the string of nationalizations initiated by comrades Henry Paulson, Britain's Alistair Darling and Germany's Peer Steinbrueck, all with a strong conservative background.
Capitalism, Socialism Converge in Their Late Stages
Current events disclose a remarkable convergence of capitalism and socialism in their final stages. A privileged few cronies enjoy the perks of power and money while the other 95% have to come to terms with policies that are beneath contempt to the true interests of the average citizen/consumer.
It is not in my interest to prop up ailing banks with my future tax payments who steered themselves into unsustainable profit expectations by rejecting common sense for years.
Peer pressure adds to the systemic problem that no banker can forego profits made by all others. Going back to 2005 there were only a handful of bloggers, economists and market pundits who stood out by warning well ahead of August 2007 when irrational exuberance vanished overnight and the credit crunch set in.
Calming official voices have failed to inform the public correctly ever since.
ECB president Jean-Claude Trichet erred especially at the beginning of the crisis, spreading the wrong word that central banks are capable of ending the crisis. By now he concedes that the end may be far off.
Fed chairman Ben Bernanke did not perform better. Both his speeches and the FOMC's monetary policy of the past 18 months are undeniable proof that the Fed has been behind the curve since the onset of the crisis, fulfilling former Fed chairman Paul Volcker's predictions that US fiscal and monetary policy would be "too little, too late."
The short breath of relief in the aftermath of Obama Barack's electoral victory has meanwhile given way to a far more somber scenario. The president's daily live appearances may show his commitment to the American people, but they lack any guiding substance. Neither he nor treasury secretary Tim Geithner have offered more than vague promises to fix the system, unfortunately omitting anything that could be construed as an effective start to tackle the worst insolvency crisis in history. Do they have a plan, it has to be asked repeatedly until they come forward with an unambiguous policy that shows a willingness to save and distribute government money to those in need.
The situation in the final era of busting fiat currencies reminds me a bit of the system wars between a sleek Apple MacBook Pro and the failure-prone Windows software architecture. Although 90% of PCs are running Windows this does not make them better computers. Remember Microsoft CEO Steven Ballmer who wrote in an email last year that he would get a Mac were he not working for Microsoft!?
The same happens on capital markets. Although the history of fiat currencies is a stream of hyper inflation tales the gold standard does not even get discussed in top circles. This will be hard to overcome as the hopeless indebtedness of the first world can only be written off via hyper inflation or war.
Also do not forget that the world has alrady turned upside down. Now it is the former paupers financing the profligacy of the western money sultans who wrongly thought that creating more paper equals more wealth.
What Happened To Common Sense?
The failure to apply common sense in a world where external business consultants direct company fortunes with their one size fits all templates appears systematic. Over-specialization has elevated many consultants to their own level of incompetence.
Take the car industry for instance. German producers still bet heavily on HP monsters capable of 150 mph top speeds. That's maybe useful for 3 AM commutes between Frankfurt and Hamburg, but in the daily traffic jam choking all metropolitan areas worldwide I would rather prefer some sort of living room on 4 wheels.
The Wrong Dogma of Ever Expanding Credit
Monetary policy has the same shortcomings. Blind to any other model than the perma-failing fiat currency ideology central banks shy away from any thought other than the current - but probably outdated - dogma of ever expanding credit.
Continuous failings of the fiat money system in the past 3 centuries have been aggressively ignored by economists and those actually involved in the economic process. Apart from Hungarian Antal E. Fekete there are no scholars researching the virtues of a gold standard that held inflation close to zero for more than a century in the USA before the Federal Reserve was formed.
Central banks have certainly done an excellent job in demon(eti)zing mankind's oldest currencies: gold and silver.
I am always appalled that the majority of fund managers still doubt the virtues of the only asset that is not somebody else's obligation.
As the whole world is about to suffer dearly from a crisis that has its roots in the irresponsible easy money policy of central banks I begin to wonder why there are no calls for responsibility. Like 9/11, where not a single military was charged with the greatest blunder in American defense policy, all those responsible for the current economic mess have been sent home with a golden parachute after proving their incompetence in the field. This is morale hazard and socialism for the rich at its best.
Who Will Be Held to Account?
While stealing an apple in a grocery store can earn a hungry impoverished evictee a life sentence if it was the third apple he grabbed to fill his revolting stomach, Ponzi schemers like Bernie Madoff are treated with silk gloves. Bankrupting thousands of investors to the tune of $50 billion, Bernie was let to enjoy his luxury condo another 3 months. What an awkward reminder of the sad truth that you are a murderer when killing one while one advances to a statesman when having killed thousands. The same seems to apply for fund managers who bet their clients money on exotic derivatives. It can be safely assumed that Madoff is only the tip of the iceberg.
The breakdown of morale at the wealthiest levels came with the markets nosedive to its current lows: When the going gets tough, everybody runs for the cover of cash.
While the banking crisis in the Great Depression took ist victims, today's Wall Streeters can only be seen jumping out of windows with fat golden parachutes. So much about the self-esteem of the posterboys who had never tired to preach the virtues of performance optimization and risk-taking.
Those few changes made at the top executive level are only window dressing a yet unsolved problem: Out goes the guy who didn't see it coming, and in comes another guy who had not see the oncoming disintegration of American (or European) banking. Is this really the needed change? I highly doubt it.
Politicians Asleep at the Wheel
Our honorable representatives in national and supra-national parliaments are asleep at the wheel meanwhile. Their ears filled with SOS calls from the banking lobbies they are not shy to announce 14-digit bailout packages as if they had only to reach into the state's coffers.
This is not the case anymore. After 4 decades of Keynesian politics all Western countries find themselves at the top of international creditor lists, meaning they have only excelled in creating more public debts instead of obeying the basic rule of commerce:
You cannot live on debts forever.
American and European politicians are in for a rude awakening any day soon. China has already publicly voiced its concerns about the solidity of US debt paper in light of an economy caving inward.
The enormous self-destructive dynamics of the current economic hurricane may bring rapid change. People were trampled to death when Wal-Mart offered cheap holiday packages. What will happen if there is a food shortage?
I do not fear that there will be not enough food. But the fact that foods goes through 20 transport stations, on average, until it lands on our table, leave enough risk factors for possible supply disruptions that a recession inevitably creates.
Politicians, now still willing to throw gazillions of fresh fiat money, will very soon have to come to terms with a broadly changed capital market. Close to a billion mostly indebted Western consumers are not exactly the kind of clientele the emerging nations in the eastern hemisphere would like to have. Confronted themselves by faltering economies due to plunging exports they are more likely to use their national savings for domestic stimuli instead of feeding a Western elite that was entirely wrong in its predictions about economic developments although deteriorating indicators had written it on the wall since at least 2005.
Western States Find Themselves in the Role of Beggars
10% unemployment in the USA and not much less in the EU, at least according to official figures, will not make raising capital any easier.
While Mr. Obama certainly radiates a strong commitment to change America's fate, it can nevertheless be denied that he is the biggest beggar in the world who has to come up with some $5 billion in new funds every day, 365 days a year, in order to keep the US in its ill-fated tracks where the military's role seems only to grow.
The situation is not much different in Europe. Starting with my home country Austria that turns out to become the biggest victim of the financial recolonization of the former Austro-Hungarian empire and will probably need IMF help at some later stage, faltering property bubbles in other European parts will only serve as a precursor to a wave of corporate and personal bankruptcies.
Investors have already shed quite some fat last year. According to venture capital group Blackstone, in 2008 $50 trillion or half of the world's savings, were eradicated by crashing stock markets. Or do you know anybody who still made a good bundle last year?
This will limit lending for governments too, when even the ultra-rich have downgraded to merely ultra-rich within a year.
A Struggle of 2 Ideologies That Have Both Failed
This leads me back to my headline. As we have now witnessed the complete and total failure of both Communism and Capitalims within 2 decades the question has to be allowed why politicians still stare at the same worn out pages of their PR cook books, offering only more of the same nonsense that has brought the global economy down to its knees in the first place.
The dispute whether state management or private management is the better option is so long meaningless as we are not able to improve the safeguards that effectively block opportunities to loot the system. As we see these days it often was not a problem that authorities did not know about possible felonies among fund managers and bankers, but that the whole regulation procedures were not enacted against the respective cronies profiting illegally from it. IMHO effective regulation can only be enacted with a focus on true transparency. Why not the Swedish model, where all public documents are indeed public and accessible online?
When taking a closer look at the EU, I notice alarming trends towards more secrecy of this supra-national body that intervenes in the daily lives of some 500 million Europeans. I cannot shed the impression that current political activity serves more the ruling powers who keep telling us they are proteting democracy for us while a slew of police state like legislative shows the opposite. Do they want to save democracy from their citizens who may think very differently than the elected representatives.
As long as there is cronyism and tightly knit elites both political models mainly serve their promoters but not the voters. It is time to think about a 3rd way that combines the motivating factors of capitalism with a social security net that is an expression of the development of our civilization. After all, we should be able to talk instead of wielding ever more sophisticated sticks and stones in countless wars around the world.

Wikinvest Wire