brian . holmes on Sat, 9 Jun 2012 12:35:15 +0200 (CEST)

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<nettime> Nightmare or Opening?

[Greets everyone. I will be holding a version 2.0 or European redux of the Three
Crises Seminar in Berlin from June 17 to 23 (
Armin Medosch will be there as an interlocutor for about half of it. Given the
context I guess many will want to talk about KW, Occupy Berlin, the Berlin
Biennial, etc. Go for it, let's get somewhere. Since this thing is a class and
an ongoing experiment in a free university which is not confined to any
particular context, I'm actually more interested in the ideas, which have
everything to do with the article below -- written by one of the financiers who
have pushed us all to this brink. What does such language mean? How to react? Is
there any way to seize this historical moment? Those are just some of the
questions. Hope to see you in Berlin! - BH]

Living Europe?s Nightmare
Christopher T. Mahoney

Losing a long war is always hard to accept. Hemmed in by the Americans and the
Russians in the final days of World War II, Hitler convinced himself that he had
two armies in reserve to mount a counter-attack and win the war. Meanwhile,
having lost the entire Pacific, Japan?s Imperial Cabinet believed that no enemy
could set foot upon the country?s sacred soil. When the truth is unimaginable,
human psychology finds an alternative reality in which to dwell.

That describes the global situation today. The entire planet seems to be in
denial about what is about to occur in the eurozone. Pundits keep expecting
Germany to pull a rabbit out of the hat and flood the continent with Eurobonds,
or that Mario Draghi will mount a coup at the European Central Bank and buy up
every deadbeat country?s bonds.

Either could happen, but both are extremely unlikely. Germany cannot guarantee
the eurozone?s debt without control over the eurozone, which no one has offered,
and Northern Europe will not permit the ECB to be hijacked by ?Club Med? and
turned into a charity organization. It is not just a matter of politics; it is
also ? as the Germans keep pointing out ? a matter of law.

Europe has a Plan A, whereby each country would reform its economy, recapitalize
its banks, and balance its budget. But Plan A is not working: its intended
participants, most notably France, are rejecting it, and there is an emerging
southern European consensus that austerity is not the solution.

Greece?s recent election has put it in the anti-austerity vanguard. Italy and
Spain (which does not have enough money to bail out its banking system), have
similarly called for an end to austerity, and Ireland will be voting on it soon.
All have lost access to the bond market, and Portugal is so far beyond hope that
its sovereign debt is trading for cents on the euro.

There is no well-thought-out plan for the orderly exit of the eurozone?s
insolvent countries. There are no safeguards, no plans, no roadmap ? nothing.
The Maastricht Treaty, like the United States Constitution, did not provide for
an exit mechanism. So, instead of realism and emergency planning, we get denial
and more happy talk. But, just because something is ?unthinkable? doesn?t mean
that it can?t happen.

In fact, it already is happening. Greece is rapidly running out of money; its
residents are withdrawing their deposits and have stopped paying their taxes and
utility bills. Even if the country can stay afloat until the June 17 election, a
disorderly eurozone exit, default, and currency redenomination will follow.
Greece will be dependent upon foreign aid for essential imports such as
petroleum and food. Civil order will be difficult to maintain, and the army may
be forced to step in (again).

Once Greece goes, runs on bank deposits are likely to follow in Spain and Italy.
There is nothing to stop Spanish and Italian depositors from wiring their euros
from their local bank to one in Switzerland, Norway, or New York. At that point,
the only thing still standing between the eurozone and financial chaos will be
the ECB, which could buy government bonds and fund the bank runs. The scale of
such an operation would be enormous, and would expose the ECB to huge credit
risk. But it could, in principle, step in ? if Northern Europe permitted.

If the ECB does not step in, Italy and Spain, too, will be forced to exit the
eurozone, default on their euro-denominated sovereign and bank obligations, and
redenominate into national currency. Massive losses would be imposed on the
global financial system. Given the opacity of banks? exposures, creditors would
be unable to discriminate between the solvent and the insolvent (as was the case
in September 2008).

The US banks most likely to be affected by such a scenario would be the
globalists: Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, and
Morgan Stanley. They would require a rescue package similar to the US Troubled
Asset Relief Program, created after Lehman Brothers? collapse in 2008. The US
can afford a second TARP, but it would require Congressional legislation, which
is not guaranteed (though the US Federal Reserve can, of course, keep the system
funded no matter what).

Massive wealth destruction, combined with global financial chaos, would pose a
challenge to monetary policymakers worldwide. Central banks would be tasked with
preventing deflation, implying a major round of quantitative easing. But, since
banks are the transmission mechanism for monetary stimulus, this presupposes
functioning banking systems. Each country would need to restore confidence in
its banks? solvency, which would most likely require a blanket bank guarantee
and a recapitalization scheme (such as TARP).

The US financial system can withstand any shock, because the US can print the
money that it needs. The Fed can maintain nominal prices, nominal wages, and
growth if it acts heroically, as it did in 2008. The stock market will react
negatively to the level of uncertainty caused by the collapse of the European
financial system (as it did in 1931), and the dollar, yen, and gold should
benefit. The fate of the British pound and Swiss franc is impossible to say;
they could benefit as safe havens, but their banks are highly exposed to the

It is bad enough that the world is utterly unprepared for the future that can be
foreseen. The unanticipated financial, economic, and political consequences of
the coming crisis could be even worse.

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