Wretchard:
My guess is that the successor system guiding the financial world will be as fully complex and opaque in its own way as the one it will replace. Which brings us to the question of systemic risk. It will still exist, but it will exist by definition, in the very places where Barney Frank and Chris Dodd’s regulator cannot go.

So if I were to assemble the main thoughts of the last couple threads I would follow this up by saying:

The efforts now underway are to going to be to replace American chicanery with International chicanery. They will do it by way of privatizing profit and socializing risk using mechanisms that are are very opaque–just as the US has done.

Does this mean the problems we are currently facing would happen more frequently?

Likely yes.

Why?

Because people are likely to take more chances if the risks of failure are lowered.

What was the problem for which the internationals will offer a solution? We were creating bad property debt properly ranked junk and selling it at home and on the international market as triple A. US & Major international entities bought the junk. US and European banks then used the junk to leverage what was often more junk.

This was not a problem that affected Asian banks in a big way. Rather the problem of over leveraging was focused mainly in the US and Europe.

What’s especially galling to some countries like Russia is that when US debt unwinds — its effects seems to more adversely effect them. The US economy goes in the tank, oil prices collapse. Russia goes in the tank. What’s fair about that?

The virtuous circle seems to work against them. The Russians reason that just because the US economy collapses — doesn’t mean that oil prices should collapse. Are they wrong? Well duh. Yes.

A lot of US capital has been vaporized. The US has lost the time cushion it once enjoyed. That the USA needs to recapitalize–and do so relatively quickly–not just for the sake of the USA but also for the sake of the rest of the world so as to retain the value of their dollar reserves.

Since much of the world’s economic health depends on the Health of the US economy and the dollar remains the world’s reserve currency and the USA remains safe harbor– the US is being funded in such a way as to enable dollars to be invested in such a way as to change capital flows.

The two biggest changes in the international monetary flows since WWII occurred 1.) in the 1970′s when the US started importing oil and US dollars went overseas to pay for the oil 2.)in the 1990′s when the US started running up huge deficits to the chinese to pay for cheap goods.

The US dollar can no longer sustain the international system while the US is importing both oil and chinese goods. The US has to stop sending dollars overseas for at least oil or chinese goods in order for the dollar in the world’s banks to retain its value. ie if the value of the US dollar goes Wiemar worthless then the rest of the world’s built up wealth goes down too.

Which one –oil or chinese goods — will the US concentrate on stopping importing.

The choice is oil. I think the Obama administration is on track to create a lot of new US oil supply in the next three years–much of it from renewable sources. I don’t know whether this will be enough to keep world oil prices down–which is key.

I think all the international bankers get this and all are onboard. Its in their interest for the US to succeed.

The dollar is essentially the world’s reserve currency. That’s why you hear talk from the Russians at Davos of the world exercising more control over the US Fed. What’s not spoken publicly was that the reason the Fed has been very opaque about where the first trillion or so of TARP dollars went — is that likely several hundred billion or so of that went to overseas banks–to make good on junk the US was selling.

The Russians want more credit for the control the Chinese say, already exercise over the fed. As well, they may understand that on these matters–Chinese interests are not aligned with Russia. That is Chinese interests would align with the US on oil and monetary policies for the same reason that Russian interests would align with OPEC on oil and monetary policies–with the Russians joining the ranks of the Iranians wishing to oust the dollar as the world’s reserve currency for political reasons.

Politics is the art of being right even when you are wrong.

I don’t know what this means in this context. For example, will support for change in the international system materialize if the current solutions in place solve the problem.

I heard Neal Cavuto say the other day that last time he checked in international capital flows were starting to return to normal.