Belmont Club

The Last Throw of the Dice

As the world watched the EU unsuccessfully attempt to contain the European sovereign debt crisis, which has gotten so large that Fareed Zakaria was moved to declare, “only China can save Europe”, clever minds in Washington have been at work. Today the Washington Post reports that the Fed is going to save the EU.

Worried that a mounting debt crisis in Europe could trip up the global economy, the Federal Reserve opened its vault Thursday to the central banks of other countries in an effort to head off a crippling shortage of dollars.

The main recipient of the Fed’s money is the European Central Bank, which will in turn extend dollar loans to banks in the nations that use the euro currency. Those banks do significant business in dollars, for instance making loans to customers operating around the world, and have been finding it harder to raise dollars from anxious investors.

The Fed is leading “the world” to the rescue of the European Project because its failure is unthinkable, even if it appears inevitable.  To keep the credit of the world from freezing  they will throw every dollar, yen, pound and franc onto the bonfire to warm it up.

The initiative, which entails temporarily swapping dollars for foreign currencies, also involves the central banks of Britain, Switzerland and Japan, underlining the extent of international concern about Europe’s deteriorating financial system. By tapping the Fed for dollars, the other central banks are taking advantage of long-standing arrangements, first put in place four years ago at the outset of the global financial crisis to prevent bank.

Reuters reports that the Eurozone crisis is now coming to a “dramatic end”.  Despite assurances by Greek officials,  “credit default swaps were pricing in a more than 90 percent chance of default”.  As Greece staggered, it threatened to pull down other countries with it.  “Greece may be seen as setting a precedent for Portugal and Ireland, analysts said. Yields on peripheral euro zone debt could surge rapidly, making funding costs increasingly unsustainable.”

That might lead not simply to one default, but many.  Sovereign defaults force the collapse of banks which had loaned money to these insolvent countries.  The collapse of the banks would in turn force the economy of Europe to grind to a halt.  The EU project would come to an end with all the suddenness of a steel safe dropped from the top storey of the Empire state building.

“Some damned fool thing in the Balkans” — Greece in this case, not Serbia — is triggering a cascading sequence of events. In 1914 it was a series of linked alliances that pulled Russia in after Serbia, Germany in after Austria, France in after Russia, the Ottomans in after Germany and the British Empire in after France. The result was the Great War. In that far off day, all America had to do was wait things out and sweep up the pieces from the exhausted participants. Doubtless someone will do the same now.

But America won’t sit on the sidelines this time. The World is at risk, and as the song goes, “we are the world”. We are the people we’ve been waiting for.

In the present case the cascade is even more farcical, if such a word can be used to describe tragedy. The EU cannot ditch Greece because it is too important for the European project.  “Too big to fail” in other words; and the US can’t see the EU go down either. The mouse pulls in the cat, which drags in the dog, which hauls the man and the crowd … and everybody into the water.  And their epitaph will be: “here lies … They were Too Big to Fail.”

It is the same logic which consumed trillions of dollars in the US bailout packages. Car companies, environmental agendas, political housing commitments and health care promises, were all Too Big To Fail. And according to the sophisticated logic of Washington, all of them had to be saved at the expense of each other. The current crisis will be remembered as a party of bankrupts lending money they didn’t have to each other in one final bid to bail pay each other’s bills.

This demonstrates the extent to which global system will fight to keep power, whatever the risk, whatever befall. Their chances of success seem slim. They are fighting arithmetic, an opponent against which no government has ever won. But they are full of confidence. As Kaiser Wilhelm II put it, “You will be home before the leaves fall from the trees.”

Storming the Castle

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