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article imageOp-Ed: Europeans ridicule U.S. while $62 trillion in securities market looks nervous

By Paul Wallis     Sep 22, 2008 in Business
The slapstick extravaganza of the U.S. financial woes have drawn a torrent of criticism from the Europeans. This criticism is no better informed than the U.S.'s own internal blamefest. And it turns out the securities market is worth $62 trillion.
Europe’s own banks aren’t doing too well, either, so some bending of regulations has been happening there. In Britain, a major bank HBOS, has been merged with Lloyds TSB.
Europe likes its status as an economic superpower, and the chance to throw a few rocks across the pond is probably hard to resist. The sources, however, are pretty hilarious themselves.
The LA Times:
The finance minister of Italy's conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the "voracious selfishness" of speculators and "stupid sluggishness" of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.
"Greenspan was considered a master," Tremonti declared. "Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most. . . . It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system. Until a few days ago, very few were willing to realize the intensity and the dramatic nature of the crisis."
Italy, of course, is a financial paradise, where extortion represents a healthy percentage of GDP. The mistake is believing that US regulators had any real power in the pre-meltdown era. In Europe, regulation is arguably obsessive, and highly bureaucratic, so they don’t realize how different the regulation is.
The French have remained consistent:
"Between the dread of a world in the midst of collapsing and the shiver of pleasure that finally something serious is happening to the kingdom of liberalism, how to orient oneself?" Eric Aeschimann wrote Thursday in the newspaper Liberation, a voice of French intellectuals whose disdain for capitalism persists in the 21st century.
Expressing nostalgia for "the good old days when bankers jumped out of windows," Aeschimann condemned as "extortion" the rescue of U.S. corporate giants by the very state that free-marketeers resent.
What a nice bloke. Exactly like the U.S. election, everything can be solved by ideology. Someone will ride in on a white elephant or donkey. It hasn’t occurred to them that this problem isn’t going to be fixed by speeches.
The fact that the world economy could have been in free fall last Friday apparently hasn’t been considered. The US dollar would be in a nosedive, and people’s incomes would be worthless. Inflation would go through the roof.
That has happened, several times, in several countries, in living memory, and recently. It happened in Germany, it happened in China, in Zimbabwe, and a brief taste in the form of oil prices was going quite nicely in the U.S. a few months ago. Imagine if it was bread costing $200 a loaf, and you’ll get the idea.
It’s fascinating that anybody who’s ever had an education can assume that this is a situation where things will continue normally if a few more big banks or institutions fall over.
The Economist explains the damage done by Lehmann Bros. alone:
A bankruptcy the size of Lehman’s has three potential impacts on the $62 trillion credit-default swaps (CDS) market, where investors buy insurance against corporate default. All of them would have been multiplied many times had AIG failed too. The insurer has $441 billion in exposure to credit derivatives. A lot of this was provided to banks, which would have taken a hit to their capital had AIG failed. Small wonder the Federal Reserve had to intervene.
Note that figure: $62 trillion. Not $700 billion. That's what's at risk. Lehmann Bros alone, while going down, can still do some serious damage. That's also why "exposure" to the derivatives market is so much of an issue with the markets and the credit providers. The politically shameless U.S. media didn't get quite get around to mentioning that, did it?
There's a lot more information in The Economist's article, and if you want to find out what insomnia can do for you, it's worth reading what those "three potential impacts" are.
They all figure out as ways of losing very large amounts of money.
The U.S. taxpayer would be blown out of the liquidity, permanently, if enough big institutions went down and took enough of that $62 trillion with them.
AIG and Lehmann alone are serious enough, and people are still likely to lose big money as a result of the Lehmann collapse. If AIG had gone down as well, the tsunami would be under way as all the cross linked securities unraveled.
How many ways does this have to be explained:
If the world economy falls to bits, it’s an instant Depression, and you, personally, are instantly broke.
The average millionaire would be worth about 5 figures in real terms. Prices would completely destroy incomes.
So far the bailout has worked, markets have recovered, and the USD isn’t doing its disappearing act. The damage of the last 15 months, however, will be around for a while.
At least one person, a German lady, is sympathetic:
"And I'm furious when I see the pictures of Americans who thought they were on the sunny side of life and now have lost their homes and have to live in their cars," Evers said. "I definitely do not feel sorry for the bankers who lost their jobs in the last couple of days. I can't believe that a country like the U.S.A. could have been so careless on a money issue!"
"I was taught that the U.S.A. is the motherland of moneymaking," she added. "And now all I can see is a herd of headless chickens running around on Wall Street."
Add a reasonably well known four letter word onto chickens, and she’d be about right.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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