Sinking Beneath the Waves

Last month, I gave up writing about the European meltdown. After all, it was all so inevitable. Either Europe will take the slow and painful Japanese-American road to zombification (allowing a broken system to continue to be broken) by printing the money to support debt levels or European nations like Greece will default and all hell will break loose.

As I wrote multiple times last year, I believed the latter was far likelier, mainly because I didn’t think Germans wouldn’t stand for printing money, although so far it appears that I have been wrong.

Today Zero Hedge brings some confirmation that stern Teutonic monetarism is here to stay, and there is no Euro-Bernanke:

Today channeling the inscription to the gates of hell from Dante’s inferno is none other than yet another Bundesbank board member, Carl-Ludwig Thiele, who said that “Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis. One idea should be brushed aside once and for all — namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank.”

Fitch meanwhile believe that the Greek default will be here by March:

Greece is insolvent and probably won’t be able to honor a bond payment in March as the country negotiates with creditors to cut its debt burden, Fitch Ratings Managing Director Edward Parker said.

The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said today in an interview in Stockholm. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default, he said.

As we learned a long time ago, big defaults on the order of billions don’t just panic markets. They congest the system, because the system is predicated around the idea that everyone owes things to everyone else. The $18 billion that Greece owes to the banks are in turn owed on to other banks and other institutions. Failure to meet that payment doesn’t just mean one default, it could mean many more. The great cyclical wheel of international debt is only as strong as its weakest link.

This kind of breakdown is known as a default cascade. In an international financial system which is ever-more interconnected, we will soon see how far the cascade might travel.

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Will Warren Buffett Bail Out the World?

According to Buffett: No.

From Bloomberg:

Berkshire Hathaway Inc.’s Warren Buffett, who has sold most of his company’s holdings of European sovereign debt, said his firm isn’t interested in helping to bail out lenders on the continent.

“They need capital in their banks, in many of their banks,” Buffett, Berkshire’s chairman and chief executive officer, told Bloomberg Television’s Betty Liu on “In the Loop” today. “We would not be a good prospect,” he said in an interview from the New York Stock Exchange. He’s received “very, very few” calls about putting capital into European banks. “Not quite none at all,” he said, declining to name any institutions.

On the other hand, I’m pretty sure Warren Buffett will soon be channelling vast quantities of cash (Berkshire is sitting on a $50 billion heap) into European banks at liquidity-crisis prices.

Why?

The global financial system is an absurd interconnected house of cards. One falling card (like a Greek default) or ten falling cards (like the European banks who were foolish enough to purchase Greek debt) might just bring down the entire banking system, and its multi-quadrillion-dollar evil twin, the derivatives system.

Why?

Well, one insolvent institution that isn’t bailed out means that all of its outstanding debts don’t get paid, which creates huge holes in the balance sheets of other institutions. That’s why a system based on debt is so stupendously fragile. Caution will be thrown to the wind, and salvaging the remnants of the incoherent shit-heap tumbling into the earth and attempting to hold it up will once again become the mode du jour.

And just what might be brought tumbling down in the inevitable cascade of defaults?

Well, taking J.P. Morgan as an example (others are considering Morgan Stanley) just over $90 trillion of liabilities.

From Reggie Middleton:

When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM’s derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008).

The bailout-crisis-bailout approach is another reason why we haven’t had a real recovery: all the time effort, labour and capital that could have gone into solving the West’s challenges (like energy independencesustainability, infrastructure, reindustrialisationjob creation) has instead gone into saving a system that at absolute kindest is a theatre of the absurd.

The calamity of 2008 has had practically no effect whatever in reducing systemic risk, or institutional leverage, because politicians and regulators colluded with the banks to prop the system up.

Regulators are repeating the same mistakes and hoping for a different outcome.

Meanwhile, many bankers are repeating the same mistakes and hoping for the same outcome — a massive bailout paid out from the earnings of future generations.

Perhaps eventually it might dawn on the public that the problem is the system, and that to cure our affliction, the system must be allowed to fail.

Or perhaps not…