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    The question of who owns the Greek bonds has been absent from the discussion over the crisis in the Eurozone. Essentially the bonds have been bought with money loaned to the banks to keep them afloat since 2008. At zero interest the "open window" and other Treasury credit devices have put hundreds of billions into the hands of the banks since TARP. Hedge funds have joined in and they all make money insuring the bonds with derivatives.  But if that were not enough the toxic loans including the Subprimes have been bought up or otherwise unloaded on governments (taxpayers) Banks buy bonds with money the Fed and Treasury have loaned at near zero interest, collect the interest on the free money and then create crises to edge up the returns even more.  Merkel may be right, stonewall the banks and threaten Argentina, but more effective would be to call in the loans and then stonewall.
    The past 3 weeks have seen tremendous borrowing by European banks from the European Central Bank's emergency overnight lending according to the Financial Times reporters Ralph Atkins and David Oakley.  At a time when the governments are trying to get investors to buy Greek and Italian bonds, their central banks are giving the banks money to buy these very bonds.  HSBC and Nomura have reported that asset values are correlated as in 2008 and that risk and volatility are greater than at any time in the past 60 years (see Financial Times article by Tracy Alloway and Richard Milne, Friday, September 23, 2011.) Option values have doubled since August and many accounts by traders are short and clearings are being delayed.  As Michael Lewis shows in his book Boomerang (2011), the banks in the period leading up to the 2008 melt down were lending their own money to allow hedge funds to act "insanely."  Governments, in Europe and the US are doing the same now.
   For the US and the EU the answer is clear.  Raise interest rates to 4%, stop lending to the banks and buy their own bonds and, most importantly, begin labor intensive projects to put people to work.  Ultimately, governments are the last resort to credit, right now governments are giving away the store to the banks and hedge funds.  The only way out of the crisis is employment, not bank balance sheets.   See my article on banking theory and practice on the SSRN.  It can be downloaded free:  Banks and media giants need to be broken up through anti-monopoly action.  The Democrats have to have leaders who are both FDR and Teddy Roosevelt for the 21st century.

Originally posted to niccolo caldararo on Sat Nov 12, 2011 at 09:14 AM PST.

Also republished by The Royal Manticoran Rangers.

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