Belmont Club

Precious Time

Felix Salmon, blogging at Reuters thinks the Fed’s ‘radio silence’ about when and what its arrangements are with the European Central Bank for stabilizing the Euro, suggests that Ben Bernanke long had a plan the works. It’s just that he never wanted to tell anyone what it was. Salmon said,  “look at the post yesterday from the BoE,  ‘Additional US dollar liquidity-providing operations over year-end’. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed.”

I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed. …

In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks. But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.

Buy time for what?  Time to put together a “two trillion dollar bazooka” by leveraging the EFSF at “ten to one”. And what does that accomplish? Why buy more time in order to bite the bullet. And what a bullet it is. More like a 3.5″ rocket projectile.

The Christian Science Monitor says the European Finance Ministers found agreement only in rejecting Geithner. But if they had another idea in their noggins, it was not in evidence. “The so-called Ecofin meeting … had several issues on the agenda:”

• When to hand out fresh money to Greece to help it avoiding insolvency

• Whether to accept Finland’s demand Greece should provide some form of collateral for any further credit

• How and when to enlarge the European rescue fund (EFSF) which has been created to help other eurozone members in financial trouble

• And whether Europe should follow America’s example and put up an economic stimulus plan.

Behind all these issues is the question of the eurozone’s future: Can it survive without member countries giving up sovereign powers like budgetary and fiscal authority.

But stripping members of their sovereign powers is not something the E-coffin ministers can decide. But it is a question that has to be posed sooner or later and the politicians are nerving themselves to do it. Maybe they’re waiting for disaster to strike so they can pose it as an alternative.

Chris Giles at the Financial Times says that if no way is found a monstrous “chain reaction” may take place. Some of the effects, according to his chart are “street explodes”, “civil servants sacked” and “cash machines close”. That ought to make atheist Europe come to Jesus, so to speak.

The alternative would be “to restore Greece’s ability to create money to pay its bills – and that would require exit from the euro, to re-establish the central bank’s ability to create money.” But that’s not going to happen, because the European dream is too precious to give up even when it has become a nightmare.

The price of keeping the Euro going has been to apply a flamethrower to the balance sheet of the banks. They are due to lose a ton of money if the sovereign nations default.  Leon Black, head of private-equity firm Apollo Global Management LLC says European banks need to sell 1.5 trillion euros ($2.1 trillion) in assets to nurse their books back to health — a number which roughly corresponds to Geithner’s “bazooka”.

Let’s all sing the happy song.

My mom
She gave me a dollar
She told me to buy a collar
But i didn’t buy no collar
Instead I bought some Bubble Gum
Bazooka, zooka Bubble Gum.(2x)

My mom
She gave me a quarter
She told me to tip the porter
But i didn’t tip no porter
I bought some Bubble Gum
Bazooka, zooka Bubble Gum.(2x)

The fed
Gave me two trillion
The Euros needed a bazillion
But though it seemed like a crime
I used it to buy some time
Bazooka, zooka trouble come.(2x)

Storming the Castle

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