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October 23, 2011

Kaboom: The European Debt Time-bomb

The European debt time-bomb, which is euphemistically referred to merely as a crisis, is difficult to understand, if not impenetrable, and therefore the threat it poses to the world’s financial system and, yes, the US is often not perceived.  

After today’s terrific illustration of the parts of the European time-bomb that are known in The New York Times, no one has any excuses for not understanding it.  The illustration and accompanying explanation are essential reading to understanding not only the time-bomb, but also how it will explode in Europe and around the world, including, here in the US.  Read the full story/graph here

I say, “parts of the European time-bomb that are known” because, as frightening as this should be to anyone thinking about the implications of this time-bomb, it’s an incomplete picture.  No one — not governments, not bankers, not regulators, not experts — currently knows all the information or even sufficient information to fully understand the current financial complexity, interconnectedness or what would really happen when the time-bomb explodes.  

Those facts are also compellingly made clear in a New York Times page 1 article today by the best in the business Gretchen Morgenson and Louse Story:  “Bank’s Collapse in Europe Points to Global Risks.”  This details the most recent French/Belgium bailout of the bank Dexia – it was already bailed out once in 2008.  This outstanding article lays out how derivatives, including the infamous credit default swaps, are at the core of the time-bomb and how the US precedent of bailing out AIG and others at 100 cents on the dollar continues to ripple through and, in many ways, cripple the financial system today.  Read the full story here

This is why taxpayers and public treasuries worldwide will continue to be held hostage by the banks unless and until 1 of 2 things (or both) happen:  (1) much smaller banks so they are genuinely not too big to fail without causing a global financial calamity, and/or (2) there is full transparency on all financial institutions’ direct and indirect activities, including all lending, investments and derivatives, with similar knowledge on all counter-parties, accompanied by robust regulation to ensure contagion (i.e., the time-bomb explodes) cannot happen.  

Without that, we are all at the mercy of the big banks, their complexity, their lack of transparency and the threat that is at the core of their current business MO.  (See post “Bank Extortion and Hostage Taking Continues” here.)

Not only was Simon Johnson (co-author 13 Bankers, Baseline Scenario blogger, former IMF Chief Economist, etc.) a credited source for the story, per usual he cogently talks about what is really going on at his blog.  Read Simon’s take here



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