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On April 22, I wrote a diary Is Another Lehman Coming? Disaster Brewing in Athens...

I wrote:

By playing chicken and failing to accept losses, all sides risk a new Lehman style event that will engulf not only tiny Greece but the entire eurozone, threatening to break up the eurozone. Any chaos resulting from a breakup of the eurozone would be similar to Britain's action in September 1931 to break up the Postwar Gold Exchange Standard, and the resulting systemic crisis could engulf the world anew:

The headline today?

Markets Fear Greece is Another Lehman

Investors' fear that Greece could become a sovereign version of failed investment bank Lehman Brothers boiled over on Thursday and drove the U.S. market sell-off, according to one noted investment strategist. "The dam burst today," said Ed Yardeni, president of Yardeni Research. The mass selling "displays a widespread concern that Greece might be the next Lehman, and markers are getting ahead of it," Yardeni said. The solution, he added, rests with the European Central Bank, which Yardeni said needs to step in decisively and buy Greek bonds. "This all relates to the bond vigilantes saying 'no mas' to Greek debt, or however that translates into Greek," Yardeni said. "Once the bond market shut down for Greece, the response had to be a credible rescue plan and that apparently has not been delivered."

The reason for this is extremely simple. For decades, investors have put their money into government bonds confident on the assumption that if the government guaranteed it, it would be repaid. What this was dependent on was a relatively docile population accepting actualy, physical, mechanical measures that take place in government finances in order for the government to repay the bond market.

What happened in the past two weeks is that this was tested: What started off as a little worry about Greece grew slowly, and at each step it became apparent that the people of the various democracies involved, such as Germany and Greece, were deeply reluctant to make the commitments needed. The Germans felt it was unfair "Why should we pay to bail out the overconsumption of the Greeks?" The Greeks too felt it was unfair "Why should we pay? Why don't the rich pay?" In short, no one wanted to pay. As a result, bond market investors naturally started to think that they wouldn't get paid.

What makes this dramatic is that if this is the case in Greece, formely considered a well adjusted Western democracy, what of Portugal, Spain, Ireland, Italy? What of the UK, Germany, France? What of the United States? Will we really pay our debts, or would we riot if that were tested?

What about Central Banks? If they print too much money, there is inflation. But there is no inflation in the Eurozone right now-- in fact there is deflation. Today, Jean Claude Trichet of the ECB said there would be no printing money to help ward off the crisis. That suggested that he, too, was putting monetary stringency ahead of bondholders.

The problem is us. It's not the "banksters"- they're being rational. If you don't think you're going to be paid back why would you lend? It's not even the governments- they're stuck between the strong opinions of the people they represent and the unspoken mandate to preserve prosperity.

I'm here to say it's in our interest for bondholders to get paid off. When debts don't get paid, lending doesn't take place. And when lending doesn't take place, the entire economic structure of capitalism-- which is based on lending, ceases to function. Without lending, capitalism is no better than communism. It may even be worse than communism, because it is less stable. It builds up expectations only to destroy them. We as a people need to rethink the value of bondholders and the value of paying debts if we want to preserve a capitalistic society.

Originally posted to randomfacts on Thu May 06, 2010 at 03:00 PM PDT.

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Comment Preferences

  •  Tip Jar (3+ / 0-)
    Recommended by:
    Timaeus, Lying eyes, lordcopper

    "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

    by randomfacts on Thu May 06, 2010 at 03:00:20 PM PDT

  •  And tomorrow is the big day. (2+ / 0-)
    Recommended by:
    Gooserock, SallyCat

    Today was just a taste.

    •  Hmm (1+ / 0-)
      Recommended by:
      RichM

      How do you know this?

      •  Just guessing. But there are many rumors to that (4+ / 0-)
        Recommended by:
        Sparhawk, bablhous, CWalter, randomfacts

        effect. We had a real panic today, and people are seriously spooked all over the world.

        The riots in Greece means they're going to throw the government out, and a new government will likely repudiate the sovereign debt. Then the whole Euro zone topples like dominos.

        Or at least that's one of the major worries. The oil spill in the Gulf is another mega concern.

        And Wall Street is seriously spooked by the financial reform legislation. Could be a perfect storm.

    •  What Part of Today? There Appears to Be a Major (3+ / 0-)
      Recommended by:
      Timaeus, bablhous, Lying eyes

      systemic malfunction of some sort at least involved in the negative spike. There is a lot of studying going on right now. CNBC will have a live report at 7 ET (for whatever credibility they should have).

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Thu May 06, 2010 at 03:23:35 PM PDT

      [ Parent ]

  •  I don't agree at all with your last statement (4+ / 0-)

    If lenders make a bad loan they should take the loss.  The government should not print money and bail them out.  Further once the lenders take their loss the impaired assets loaned against become healthier.  This is because the loans are a liability to the creditor.  

    With the DOW dropping 1000 points today it is pretty obvious that the financial shenanigans have led to a very volatile market.

    •  The volatile market (0+ / 0-)

      is because people are coming out against bailouts.

      This is not about government bailing anyone out. This is about government meeting its own obligations.

      There is no such thing as a loan if there is no expectation of repayment.

      •  I am not quite clear on your point (1+ / 0-)
        Recommended by:
        Sparhawk

        but I think bailing out Lehman would have been a bad idea and the rest of the bailouts were also a bad idea.

        If instead a tough deal was done where these creditors took some big losses, the whole problem becomes much less of a problem.  The big reason these debtors are insolvent is because they owe too much money to the creditor.  After the creditor takes a loss this debt becomes less of a problem.

        Instead the government just printed the money and handed it to the creditors.  And so apparently we just have one big mess.

        •  Wrong. (0+ / 0-)

          The big reason these debtors are insolvent is because they owe too much money to the creditor.  After the creditor takes a loss this debt becomes less of a problem.

          The reason the debtors are insolvent is because the amount they owe exceeds the amounts that is coming in income. If you reduce the amount the debtor owes, the debtor will not be in better shape if his income goes down even faster. Which is exactly what happens in a depression. Liquidation only leads to more liquidation until you reach armageddon.

      •  If these were actual loans (2+ / 0-)
        Recommended by:
        Euroliberal, bablhous

        you would have a point.

        But most of this crap is not any one person or institution lending a dime to anyone else.

        The world's biggest banks and brokerages have become money printing houses in their own right.

        They don't "lend" money that was "saved" by someone, they "create a line of credit" which is, in effect, a loan from a future you to a present you sanctioned by the money people.

        But its up to the debt creator to share the risk. Greece is a great place to visit for a good time, but it has a long history of volatility, corruption and a populace that, unlike modern Americans, really does know how to throw the bums out.

        As the financial vampires sucked more and more wealth from the real economy this crash was always coming and should have been priced in. But that would have made it too high a price even for the dodgy people who get elected in Athens to stomach.

        So the credit creators took a punt that, in extremis, the Greek government could and would, drive its population into penury to pay off some fat bondholder in New York.

        Good luck with that. Long before then there would be blood in the streets and scurried exits by plane in the dead of night. And nobody to call on to pay the money back.

        Should Greece have got the debt? Who knows. What was it supposed to be used for? What, in fact WAS it used for?

        How much of it was creamed by the local branch of GS or its siblings rather than put to productive work?

        The system is corrupt. It is no longer a case of whether capitalism should survive or not, it is a question of what it has to do not to collapse, and whether we will get to the point where its a tossup either way.

        THEN life will get REALLY interesting.

        Until inauguration day The USA is in the greatest danger it has ever experienced.

        by Deep Dark on Thu May 06, 2010 at 04:41:03 PM PDT

        [ Parent ]

        •  Although i agree with much of what you say (1+ / 0-)
          Recommended by:
          Euroliberal

          we can't forget a few things. The banks don't lend as blindly as it seems.

          There are interconnections between governments and banks that produce various results. For instance, Greece took on 30 billion of toxic bank debt, and the Euro countries took on much more. Germany took on about 500 billion (heck, the US taxpayer gave Germany 20 billion for its banks). As well, banks sometimes forward along loans as a form of corporate welfare for gov't. The German state owns many of the banks neck deep in Greek debt. They send money to Greece (sometimes even bribing Greek officials), and the Greek officials approve projects contracted by Germany. The money returns to Germany in the end. The Greek gets a submarine out of it, and a few Greek officials make a 100 million in bribes.

          So, it's not straight lending based on risk analysis. Greece wouldn't be in this position if it came down to that.

          We've seen this kind of lending before.

          There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

          by upstate NY on Thu May 06, 2010 at 09:06:27 PM PDT

          [ Parent ]

    •  Bondholders need to do their homework (2+ / 0-)
      Recommended by:
      bablhous, penguinsong

      Everybody needs a haircut.  The government needs to raise taxes and cut spending, and the bondholders shouldn't get 100%.  Everybody is at fault.

      The same will happen here eventually, except we'll do it through printing more of the worlds reserve currency.

  •  "if we want to preserve a capitalistic society"? (3+ / 0-)
    Recommended by:
    Euroliberal, Predictor, Johnny Q

    Hmmmm.  We'll leave that question for another day.

    Pooties and Woozles unite; you have nothing to lose but your leashes!

    by TomP on Thu May 06, 2010 at 03:08:55 PM PDT

  •  Two weeks ago? (1+ / 0-)
    Recommended by:
    Gooserock

    Greece has been a big worry for much longer than two weeks.

  •  Now tell me who (2+ / 0-)
    Recommended by:
    Deep Dark, Euroliberal

    ...this "we" is that must pay our debts all of a sudden in the midst of a recession?  With around 10% unemployment.

    The situation in Greece was not the result of overconsumption, it was the result of the Greek government trying to get a little income out of risky investments--you know CDOs and the like.  There is only one person, the finance minister (or add in the head of state) who caused this crisis.

    Bondholders need to rethink the state of the economy and the funds with which people and governments are supposed to pay if they want to keep a capitalist economy.   You don't get double-digit rates of return forever without some correction.

    It will ripple to the rest of Europe only if the EU finance ministers let it.  The companies selling the bonds had or should have had transparent information about what what the Greek Finance Ministry was up to.

    Rigged games always collapse.  And this was a rigged game.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Thu May 06, 2010 at 03:53:25 PM PDT

    •  You're not talking about the Goldman deal (0+ / 0-)

      are you? Because that deal netted $100 million for Greece, and it wasn't a CDO, it was a straight currency swap. Essentially, it was a deal where Greece converted Greek debt denominated in euros into Greek debt denominated in dollars. After the conversion had matured, 1 billion of debt turned into 600 million (a great short) and Greece paid Goldman 300 million.

      In the end, we're talking about .2% of Greek debt.

      There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

      by upstate NY on Thu May 06, 2010 at 09:09:36 PM PDT

      [ Parent ]

  •  The assumptions that banks and gov'ts (1+ / 0-)
    Recommended by:
    Euroliberal

    don't work in concert are surely anachronistic by now.

    There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

    by upstate NY on Thu May 06, 2010 at 09:13:03 PM PDT

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