The credit market is dying, but no one has the courgage to pull the plug. This is the result not of too little credit – which could be fixed – but too much credit – which cannot be fixed.

Let it go…

We are seeing the late results not of economic failure, but of economic success – the transition of our human family from organization on the basis of scarcity, to organization on the basis of abundance. All the indicators formerly taken as predictors of the health of the economy have been turned on their head. As such, all steps being taken to prolong the existing order will only make the transition more difficult and painful.

The important thing at this moment is to sweep the credit market aside: abrogate by law all personal and public, foreign and domestic debt obligations. The houses that were built with it will not disappear, neither will the factories and farms produced by it.

What will happen instead is that they will be saved from being plowed under as they were in the 1930s to stabilize prices – as the so-called toxic assets are being plowed under with this bailout plan.

Perhaps it would be possible to negotiate new monetary arrangements based on technology to replace the fuels we burn, and medium to long term commodity agreements, where the development and assimilation of the new technologies was meshed with the rundown of non-renewables. (This needs to involve US, EUR, Russia, China, India, Brazil, Mexico, OPec in some form)

Such an approach would provide investment potential and job creation. The latter two would “buy ” political and economic time for dealing with the financial issues.

All that would be required would be a little bit less insistence on the virtues of free markets and financial engineering on one side, a little less of Festung Europa protectionist bloc on the other, and a bit more openness to the long term interests of others, rather than short term pursuit of what seems to be best for self.

A noble purpose for mankind. Any takers?

While I think that there are legitimate counterarguments (such as the lengthy CRMPG process) demonstrating that the Feds have not been COMPLETELY asleep at the wheel, I find the following quote of Yves from this piece upon which we are commenting, to be noteworthy:

“…it shows how hard it is for governments to respond in market time.”

I agree. It is very difficult.

But where was their plan to prepare for this in advance?

Again, Trichet and the Europeans seem to get the kid glove treatment from all commentators, for reasons unclear to me.

Where was their plan? Were they too busy snickering at our problems stateside?

Matt Dubuque

I agree with the posters about the British dilemma. Berlin seems more in tune with Moscow than London. The City and “bullshit Britain” are screwed. The end of Atlanticism?

When the “sterling balances” were run down after the first OPEC shock, during the Carter administration, and the then Labor government of Jim Callaghan, oil trading moved to London in a new way to offset the loss of what Harold Wilson had earlier called “invisible earnings”.

London’s role in the world of the de-regulated “new finance” has grown from those humble origins, and been given some zip by privatization proceeds. BIS reports on derivative growth and activity by kind of activity and market document this extensively.

There is a relation between commodity, currency, rate swap and other markets. A huge proportion of global activity of this sort is in London, where US and EU ECB players have been able to go, freed from domestic regulatory constraint (the Gramms and energy trading).

An alternative to depreciating dollars is under public discussion in places people don’t often look, like Russian magazines. Currency basket type arrangements based on long term commodity supply agreements.

These currency basket type things include gold as an accounting element.

This type of arrangement can work in parallel with a collapsing dollar, and probably escape the notice of people who only read Brit newspapers like the Telegraph.

To look at who needs long term assured energy supplies, who has the sources, and whose income is undermined by depreciating dollars is probably to decide to pay attention to Russia’s ongoing negotiations with OPEC (the two are meeting this month, and there will be a meeting of a “Gas-pec” next month, and also with Germany, in a different way.

The British way of life as a “middle-man” based on “invisible earnings” piggy-backed on the dollar, its assets and its military support will not survive in its present form.

The global oil, metal and soft commodity producing companies, often shared between UK and NL, will perhaps be interesting indicators of the emergence of a different kind of middle ground.

It is not easy to see how that would fit with “Mittel Europa” given the issue of Russia and fuel supply, and the history.

All these issues, I believe, indicate that politics and strategy need to be brought back into the calculus of thinking about the economy and finance. These are not local issues, but global ones working through locally developed institutional arrangements.

The situation which brought about this action, and the very vociferous complaints of EU countries (seeing as legal is legal everywhere) was the refusal of the EU to participate in the policing of Mediterranean frontiers with North Africa. Spain, being the closest entry point across the Straits of Gibraltar or through Melilla and Ceuta was saddled with the bulk of surveillance and later, management and repatriation. They correctly claimed that it was a European, and not national problem.

The ploy worked and Brussels now participates. That’s how stuff gets done in the EU.

As an aside, and with respect to yesterday’s Evans-Pritchard episode, smart money would bet on Great Britain in the EMU before Italy out.

Now all the tail winds may become headwinds at a time the government may need to swing to a big deficit to maintain existing program spending. Essentially there does not appear to have been saving in the good times for a rainy day.

semi-Offtopic:
Other countries should look into insuring MM funds. The necessary premiums for $152bn is assets is only $40mn and that's from a AAA+ counterparty. For those playing along at home, the insurance premium is a whopping 0.02631578947368% and I don't think the Treasury is charging them that monthly basis, even though they are probably insuring the worst $152bn in MM funds out there (source: Fed reserve + Treasury Oct 1 report)

Does that mean that the europeans are counting on us to prop up the worlds banking system? And if we are the only hope, do we have any choice?

Is this the reason we are putting a palliative on instead of recapitalizing? Because we do not want to be on the hook for the entire world?