The Big Choice

[WillyT]

The big choice
by David Atkins ("thereisnospoon") - Digby/Hullaballoo
Sunday, August 28, 2011

This triple crisis post http://triplecrisis.com/how-to-turn-a-continent-into-a-subprime-cdo/ Digby referenced yesterday may be the most important thing anyone interested in politics and economics may read for a long time. There are too many important points in the article to summarize in a neat block, so I won't even try. Interested readers need to consume the whole thing several times. Those who aren't already knowledgeable about such things might require a brief primer on CDOs (collateralized debt obligations) and CDS (credit default swaps) to really understand it, but it's worth it.

The key upshot is this: European central banks took on increasing amounts of leveraged debt--partly from the same fiscal insanity that plagued the Anglosphere, and partly by buying up bonds from less stable economies such as Greece and Iceland. Pretty much every European nation except Iceland made the decision to socialize the financial industry's losses and turn the banks' private debt into public debt. The only problem is that there's far more banking debt out there due to leverage, than the collective economies of the Eurozone nations have to bail them out with. The Eurozone problems are not a result of overly generous social welfare systems, but rather of the combination of those systems with an attempt to take on debts of their banking institutions. Fairly soon, none of the Eurozone nations will be able to stand up under the weight of those needlessly undertaken obligations, in part because the inflexible structure of the Euro has made it such that the entire Eurozone sinks or swims together.

The nations of the Eurozone have two choices here: either let their big banks fail under the weight of their leverage, or radically restructure their societies and social compacts at the expense of their people, in order to protect their banks. So far, most Eurozone nations are choosing the latter.

The case of Iceland is particularly interesting here. Icelanders decided not to bail out their banks, but rather to let them fail, leave the bondholders who risked investment in the nation's banks out to dry. Icelanders have decided start over while taking care of their people first, and foreign bondholders last. That reasonable and moral approach has been met with outrage by most of the world's financial elites; Britain is now suing for remuneration on behalf of British investors in Icelandic banks.

More: http://digbysblog.blogspot.com/2011/08/big-choice-by-david-atkins.html

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