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There's no pleasure in the vindication: four years after Northern Rock's collapse, three years after Lehmann, those of us who predicted  a double dip recession are seeing it transpire before our eyes.

In that sense, it is fair to argue that the recent increases in the public-sector indebtedness of many developed economies is the consequence in large part of the decisions taken in 2007 and 2008 not to let the banks and the financial system collapse.

Arguably the deleveraging of the banks, the shrinkage in their balance sheets, has been transferred to the state.

The overall volume of indebtedness in the economy is therefore still with us - although it has been shuffled from financial sector to public sector.

The massive debt of the shadow banking system, now socialised and transferred to the tax payer across Europe and the US, is causing a run on sovereign debt across Europe: Greece, Ireland, Portugal, Spain, Italy and now even Belgium are seeing the costs of government borrowing rise. They're trapped in a uniquely evil trap:

1. Borrow to reflate - and see the bond markets speculate the debt is unserviceable
2. Cut expenditure - and see the bond markets speculate the lack of growth is unsustainable

Neoliberalism is bankrupt - literally. 30 years of Reagan Thatcher, which saw real wages in the UK and the US actual fall, and living standards only rise through increased debt, has now no way of reflating itself. Nearly all the fiscal and monetary bullets are now used up.

The last remaining weapon in the armoury - Quantitative Easing - will just flood the shadow banking system with cash for ever more destabilising speculation on commodity prices and government debt default.

What has been described as feral finance is virtually impossible to regulate by one government alone. The virtual movements of capital have no borders. They seem to be able to blackmail any government at will. The only solution to the dysfunction of the shadow banking system is concerted global governance. But instead of working together, most governments are engaged in competitive currency manipulation.

This is like the trade war of the 1930s - but happening at a much faster velocity. The lack of solvency in the global system could soon create another disastrous liquidity crisis: interbank lending ceases up, investment withers, trade stutters, ships queue outside ports....

There's no leadership in Europe. The US is distracted with it's own political gamesmanship running up to an election year. As Gordon Brown has just written in the Huffington Post:

Europe's problems can only be truly understood in three dimensions: not just as a fiscal crisis but as a pan-European banking crisis -- which started as, and continues to be, one of massive unfunded bank liabilities -- and as a trans-continental crisis of low growth, in part the result of the euro's deflationary bias.

Together, and in lethal combination, these three problems threaten to create a tragic roll call, year after year, of millions of European citizens unnecessarily condemned to unemployment in a wasted decade.

Having started from the wrong analysis, leaders have been making exactly the same kind of mistaken judgments we have seen in the U.S., where there are four political no-go areas: no higher taxes, no entitlement cuts, no economic stimulus and no infrastructure investments. These political constraints have also trumped an agenda for growth, and yet another engine of the world economy is being shut off from anything other than an anemic recovery.

The rise in jobs in the US just announced - at 117,000 stronger than anticipated - is unlikely do cause much more than cause a temporary uptick in world markets.

Where next?

Originally posted to Brit on Fri Aug 05, 2011 at 05:44 AM PDT.

Also republished by Moose On The Loose.

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Comment Preferences

  •  It Wasn't Intended to Actually Work, It Was to (11+ / 0-)

    concentrate wealth to the super rich.

    Besides, is anyone other than Iceland and a South American country or two throwing the neoliberals out of power?

    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 Fri Aug 05, 2011 at 05:46:13 AM PDT

  •  Where To Start? (3+ / 0-)
    Recommended by:
    Brit, CA Nana, ericlewis0

    One possibility is that the next time banks come hat-in-hand to government for rescue, JUST SAY NO.

  •  The biggest problem in Europe right now is the (7+ / 0-)

    incompetence and stubborn ideology of the current conservative govt. in Germany.

    If Red-Green were in charge, then taxes on the rich in Germany would have gone up and stimulus spending increased, which would have set the tone and imo many European countries would have raised taxes on the rich, as well, and done less slashing of spending.

    Merkel's govt. has a 75% unpopularity rating now, btw.... that has got to be one of the highest level of buyer's remorse in the history of Germany.

    "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

    by Lawrence on Fri Aug 05, 2011 at 05:59:39 AM PDT

    •  The bigger problem arising from that... (10+ / 0-) that the ECB basically sets policy to suit Germany which has basically trashed the unconverged economies of the littoral.

      There's actually no plan for any country leaving the Eurozone. Monetary Union without Fiscal Union was always a bad idea. While there's nothing else to speculate on, the vast amounts of cash swishing around the banking system, rather than going into productive investment, finds much higher returns speculating on a Eurozone collapse.

      It's as crazy as an energy company selling blackouts...

      Oh wait.

      "It is only for the sake of those without hope that hope is given to us." Walter Benjamin. More sane debate on the Moose

      by Brit on Fri Aug 05, 2011 at 06:03:56 AM PDT

      [ Parent ]

      •  Yeah. (3+ / 0-)
        Recommended by:
        Brit, ericlewis0, Creosote

        The best thing would be a govt. recall in Germany.

        The head of the SPD actually proposed a sort of Marshall Plan for Greece.

        We need more people who think like that.

        "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

        by Lawrence on Fri Aug 05, 2011 at 06:05:54 AM PDT

        [ Parent ]

        •  At least a Marshall Plan... (7+ / 0-)

          ....would pump money into productive investment in Greece. The current austerity plan is just a way of transferring more assets from the domestic public sector to the private sector overseas.

          "It is only for the sake of those without hope that hope is given to us." Walter Benjamin. More sane debate on the Moose

          by Brit on Fri Aug 05, 2011 at 06:11:21 AM PDT

          [ Parent ]

          •  Well, tbh.... the Greek state does need to get its (3+ / 0-)
            Recommended by:
            Brit, cotterperson, Creosote

            act together.  It has been highly inefficient, wasteful, and corrupt for a long time.  

            It needs a mix of things... but that mix definitely needs to include higher(ar at the very least enforced) taxes on the wealthy and less selling off of public assets.

            The problem is that many countries won't raise taxes on the wealthy if Germany and other wealthy European nations won't do it, as they're afraid that they'll be even more unlikely to compete within the E.U. market.

            "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

            by Lawrence on Fri Aug 05, 2011 at 06:27:04 AM PDT

            [ Parent ]

            •  The problem with Greek taxes.... (3+ / 0-)
              Recommended by:
              Lawrence, ericlewis0, Creosote

     not their level, but their collection rates. You know the great story of the Athen's swimming pool tax. 600 pay it. 60,000 spotted from google earth.

              "It is only for the sake of those without hope that hope is given to us." Walter Benjamin. More sane debate on the Moose

              by Brit on Fri Aug 05, 2011 at 06:31:29 AM PDT

              [ Parent ]

              •  Yeah, evading taxes seems to have been (2+ / 0-)
                Recommended by:
                Brit, ericlewis0

                considered a cavalier's crime by many of the wealthy in Greece.

                And, as is so often the case, a democratic socialist govt. is having to try and figure out how to fix the crap that the previous conservative govt. had a large role in creating.

                "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

                by Lawrence on Fri Aug 05, 2011 at 06:34:38 AM PDT

                [ Parent ]

            •  Greece is Europe's welfare queen (0+ / 0-)

              Peninsular Greece has never been economically powerful since Roman times, as the action moved north to Constantinople and Thessaloniki.

              Ever since Greece won its independence from the Ottomans (with considerable help from the Great Powers of Western Europe) in the 1820s its economy has been largely dependent on subsidies from Western powers which viewed Greece favorably as the "cradle of Western Civilization" even though economically it was little better than a third-world country.  This favor was demonstrated by the Marshall Plan, in which Greece got five times as much aid per capita as Turkey.

              Without Western aid, Greece would be Armenia with more tourists.

    •  Hmm, are you sure about that? (2+ / 0-)
      Recommended by:
      Lawrence, cotterperson

      just saying, I'm more used to reading right here at DailyKos about how magically wonderful Germany is in every conceivable way.

      Oh well, I guess that's why they say the liberals are like herding cats - there's always one or two heading off in a different direction . . . .

      •  Hehe, well... I reside in Germany and have a (6+ / 0-)

        penchant for independent thinking.

        Germany is actually pretty awesome for a major, industrialized country, but the current conservative govt. can't be given any credit for that.

        In fact, they're doing their best to chip away at the things that are good about Germany, especially the neoliberal FDP.

        "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

        by Lawrence on Fri Aug 05, 2011 at 07:21:32 AM PDT

        [ Parent ]

        •  Hmm, I had no idea you were from there (1+ / 0-)
          Recommended by:

          (not that I had ever given it a moment's though before now).

          And yes, thare are some really good things about Germany - for example, the lack of speed limits on the Autobahn and the total lack of inhibition of even highly educated people to spout unbelievable sexist and racist tirades to relative strangers (i.e., me).

          I found that to be quite refreshing on a recent visit - at least after I got over being really, really unconforable about it.

          •  Erm... (4+ / 0-)
            Recommended by:
            Brit, Roadbed Guy, cotterperson, Creosote

            ... those weren't really the things I was thinking of.

            I was thinking more of:

            Solid social services
            good healthcare
            good public transport
            good, fairly independent media
            really good environmental laws
            Good, free education
            Pretty good political system

            "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

            by Lawrence on Fri Aug 05, 2011 at 08:10:05 AM PDT

            [ Parent ]

            •  Yes, I forgot to mention the good public (1+ / 0-)
              Recommended by:

              transport - spent something like 34 Euros and got a pass to go anywheres in Berlin (which is pretty freakin' spread out all over the place) for a whole week.  Very nice.

              •  Ah, you were in the best place to be in Germany. (1+ / 0-)
                Recommended by:
                Roadbed Guy

                Too bad I didn't know... I could have given you a tour.

                I sometimes see Germany in too positive of a light because I project Berlin on to the rest of Germany.  

                "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

                by Lawrence on Fri Aug 05, 2011 at 08:36:10 AM PDT

                [ Parent ]

                •  Yeah, that's too bad! I was in Hamburg (1+ / 0-)
                  Recommended by:

                  (does that have an "h" on the end?) too - also very nice.

                  However, I was profoundly disappointed at the lack of mountains and castles in either place (or anywheres in between).   In my mind - even if such places don't exist outside of the purvue of travel agency posters - that would have been the "best place to be in Germany"!

                  •  Heh... if you wanted mountains you shouldn't (1+ / 0-)
                    Recommended by:
                    Roadbed Guy

                    have stuck to the flat, northern part of Germany.  ;)

                    There are castles in the north, they're just not as visible because they have no mountains to rest on.  :D

                    But if you really want to see castles... go to France.  I think France has got to have more castles than any other nation in the world.

                    "A candle loses nothing by lighting another candle" - Mohammed Nabbous, R.I.P.

                    by Lawrence on Fri Aug 05, 2011 at 08:50:21 AM PDT

                    [ Parent ]

                    •  OK, thanks to google I figured out that (0+ / 0-)

                      I was thinking of Neuschwanstein

                      I doubt that they have anything like that in France (even if they did, I'd sooner cut my tail off - even though I don't actually have one - than go to France).

                      Anyways, and this might be the proverbial double edged sword - as an American I'm pretty sure I have the constitutional right (the 7th amendment, maybe?) to be blissfully aware of the geography of foreign countries.  So really, how could I have known that if I were looking for mountains, northern Germany was the wrong place to go?

                    •  Wales is good for castles (0+ / 0-)

                      The English built HUNDREDS of them to hold their conquest down...

        •  The only thing I don't like about Germany (0+ / 0-)

          is the insane anti-nuclear-power sentiments of many of their people.  Don't they realize that they're just playing into Russia's hands?

  •  Wait... Reagan and Thatcher were neoliberals? (0+ / 0-)

    I'm a concert pianist with a double doctorate... AND YOU CAN BE TOO!

    by kenlac on Fri Aug 05, 2011 at 06:33:11 AM PDT

  •  great diary, bet you're missing Brown about now... (2+ / 0-)
    Recommended by:
    Brit, ericlewis0

    i think you're spot on about a solution requiring global input don't know where the leadership for that can come as everyone is tanking at once.  Going to be a wild ride.

  •  Brit - your Guardian link partially blames Murdoch (3+ / 0-)
    Recommended by:
    Brit, cotterperson, Creosote

    for this financial catastrophuck:

    Hackgate reveals the mechanisms of a network of corruption whose broad outlines were already understood. What we see, however, is not a distortion of an otherwise functional system but one element of a system that can only operate through such corrupt mechanisms. What we are seeing, through its moment of decomposition, are the parochial arrangements through which neoliberalism was established in the UK.

    Not sure I fully get it, but I believe it. Thanks for the post. :)

    I ♥ President Barack Obama.

    by ericlewis0 on Fri Aug 05, 2011 at 07:12:12 AM PDT

  •  Where next? (5+ / 0-)

    We've got to fix the financial situation, which is the root of the problem. The trouble is, worldwide people  have been victims of massive fraud -- $601 trillion!

    In an ideal situation, we would take the money back those who rigged the deal and give it back to the victims -- not unlike convicting Bernie Madoff and selling off his assets to be distributed among those he defrauded. Of course, we'll never be able to really do that, but at least we know who's responsible. A snip from 2009.

    the bulk of the derivative risk is concentrated not merely in the "financial company" category (99.7%) but in a subset of just five companies, which account for an "overwhelming majority" of derivative assets and liabilities.

    The companies in question (Total Notional Derivatives: Assets & Liabilities, $ in Trillions)

        * JP Morgan:$81.7;
        * Bank of America:$80.0;
        * Citigroup:$31.5;
        * Morgan Stanley:$39.3, and of course
        * Goldman Sachs: $47.8 (this is an OCC estimate: Goldman has not disclosed
    notional amounts in their derivative book, only # of contracts);

    It's going to be a long, slow go, but there are moves in that direction. The DOJ is investigating a global cartel of bankers

    The investigation has focused on whether Citigroup, Bank of America, and UBS formed a global cartel to understate borrowing costs, hide losses, and manipulate the outcome of derivatives tied to Libor.

    The Swiss have are cooperating on international tax evasion. In June 2010, Holder announced the arrest of 485 people for mortgage fraud. There are things going on that will address the underlying problem. (Sorry the links are old; eldercare became unrelenting.)

    Just yesterday, there was a move to expose the "dark market" that caused the worldwide crisis. (Of course, it's not retroactive, but it will provide some protection for investors.)

    The U.S. Commodity Futures Trading Commission completed the first set of Dodd-Frank Act rules governing companies at the center of the $601 trillion swaps market by adopting regulations for information databases.

    CFTC commissioners voted 4-1 today to adopt a rule registering the databases, part of a Dodd-Frank requirement that all transactions be reported to swap data repositories that will make information on trading volumes and prices available to financial regulators.

    “With this rule regulators -- for the first time -- will have specific information on the market’s scale and risk,” CFTC Chairman Gary Gensler said at the commission’s Washington meeting.

    (The whole story is well worth the read.)

    Such work is slow, of course, and the problem grows more urgent by the day.

    Please forgive the long, tangential post. I truly believe that $600 trillion has to be sorted out (if it even exists!) and some degree of restitution made before there can be enough stability to decide where next.

    That said, if it brought down enough of the people in the shadows as well as the spotlight, we might even be able to back away from the corporatocracy and move toward democracy (all of Us).

    It's not going to be easy or fast, as Obama told us so often during the campaign, but it the ideal that should direct our actions.

    imho ;)

    •  I'm not sure if it's still true (5+ / 0-)

      But a year of so ago the banking sector controlled some 17 trillion dollars in assets.

      The shadow banking sector you talk about - the 'dark market' - some 16 tn.

      "It is only for the sake of those without hope that hope is given to us." Walter Benjamin. More sane debate on the Moose

      by Brit on Fri Aug 05, 2011 at 07:44:17 AM PDT

      [ Parent ]

    •  Subject them to a Real stress test (1+ / 0-)
      Recommended by:

      and if they fail, nationalize them and fire and prosecute those in charge under criminal, not civil statutes.

      Nationalize them as the Bad Bank of the US and figure out a way to unwind them and any remaining assets. Void their shorts and credit defaults when they made money by betting against the situation they created and knew had to fail. Claw back their ill-gotten profits and put them towards restitution for the bondholder and foreclosure victims and the taxpayer.

      Allow small account holders to transfer out amounts equivalent to their FDIC insurance coverage to other solvent banks and credit unions. Kind of like a controlled run.

      No more TARP, stimulus or bailouts to the bad actors!

  •  You can follow the DOW (2+ / 0-)
    Recommended by:
    Brit, cotterperson


    Today is crunch day.

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Fri Aug 05, 2011 at 07:55:37 AM PDT

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