No losses by government decree
No losses by government decree

Central banker pointing at who will bear losses

The system is broken. Central bankers know we are in a hole, but keep digging madly anyway. It’s easier to deny reality than to confront the truth and start the long hard climb out of the hole. How else can you explain this from the head of the European Central Bank?

Trichet agreed that markets needed greater clarity from EU political leaders and said the rules would not automatically demand that private investors bear losses.

Of cause Hugo Chavez beat the EU to it:

He has promised guaranteed returns to people who invest in government-owned industries.


Meanwhile in the USA the too big to fails get bigger as does the Fed balance sheet. As for investment returns, Zerohedge put it rather well:

“Since the funding provided was in the form of ultra-short maturity commercial paper it was essentially equivalent to cash funding. In other words, between October 27, 2008 and August 6, 2009, the Fed spent $350 billion in taxpayer funds to save 35 foreign banks. And here people are wondering if the Fed will ever allow stocks to drop: it is now more than obvious that with all banks leveraging the equity exposure to the point where a market decline would likely start a Lehman-type domino, there is no way that the Brian Sack-led team of traders will allow stocks to drop ever… Until such time nature reasserts itself, the market collapses without GETCO or the PPT being able to catch it, and the Fed is finally wiped out in one way or another.”

Graphically the main foreign recipients are:

The EU democracy deficit is well known, the term oligarchy seems to suit it well. Venezuela is basically socialist despite maintaining some democratic trappings.

What about the USA? Is it a kleptocracy or a democracy?

I’ve been leaning toward the USA being a kleptocracy for some time. If the USA is not prepared to enforce the law or even allow market forces to work then it is not what it used to be. I think the rise of the Tea Party suggests others are aware of the change. But there will be powerful forces seeking to undermine the movement and co-opt it for the benefit of the few.

Covered bonds are the canary in the coal mine for Australia. If a bank issuing covered bonds became insolvent the holders of the covered bonds will receive money from the sale of assets covered by the bonds before depositors get their money.  Currently the government insures most depositors. Basically covered bonds help stop investors taking a loss and increases the chance the taxpayer will pick up the tab.

In Australia there are still strong institutions working for the public good:

The RBA Prudential Regulation Authority have warned that covered bonds could threaten both depositors and existing debt investors. Source: The Australian

But the financial vested interests are making their move:

Borrowers may face higher interest rates unless Australia’s prohibition on covered bonds is lifted, allowing banks to compete more easily for funding when a global debt refinancing wave hits in 2012, analysts say. Source: The Sydney Morning Herald

And

The ABA (Australian Bankers Association) supports the development of a covered bond market in Australia and supports more reforms to boost securitisation markets. Source: NineMSN

The RBA is enormously influential in Australia. Normally one would not bet against it. But the lure of lucre and the appeal of jobs in investment banks will seduce many. It will be interesting to see what happens. The financial sector has not captured government in Australia to anything like the extent it has in the USA.

But the vice like chokehold the financial sector has on the US will not last forever. The day of reckoning is approaching. The time will come when the people of the developed/indebted world gain a better appreciation of reality. In that instant the world will be irrevocably changed.

Concentrating the debt at ever higher levels will in the long run not generate better outcome than letting those who took the risk, and for many years received the benefits, bear the consequences of their decisions. The losses are real. They have to be born. As Schrodingers Pension concludes:

If you are worried about your pension – and you should be- then kill the banks and allow productive activity to restart in the economy. ONLY a healthy economy will give you your pension.  Keeping dead banks alive, keeping the box closed WILL NOT save you or your pension.

We are playing for serious stakes:

If we fail in this I sense that we will descend into barbarism. There is only three days without food between a happy sociable person and a mad psychopath and we really need to be very careful here. There is a Manichean competition going on with many and various symptoms-all visible at the moment, with a huge awakening of many people who were previously just compliant victims. Source: The MacPuddock comment on Schrodingers Pension



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