A TALE OF TWO CITIES

I said this was going to be a long one today, but it is not.  It's going to be short and hopefully thought provoking.  The two cities are Washington and Frankfurt, the time is the present and the issue is not the fall of French Royalty but perhaps of the European Union.

Back in 2008 Hank Paulson and Ben Bernanke, old DUSTOFF himself said, in effect, the American Financial system will not fail.  Everybody believed them and the worldwide financial system did not fail.  Today, Jean Claude Trichet said Greece would not default and every trader in Europe looked up from their stickey buns and said, "Bugger off."  And therein is the difference.   European liquidity dried up, dealers went home, the U.S stock market tanked in a nanosecond--not as a direct reaction to be sure--and the world is looking decidedly dicer today than at any time since 2008.  The bailout of Greece will fail and the contagion will spread as the Europeans and their central bank have proven unable to deal with this crisis either in a timely or effective fashion.  Money may enter Greece and if it does it will go straight out the door to the banks that hold the debt who will run like hell to get as far away from Greece as possible; Greece will be cut off from future flows, the amount of financing will in any case prove to be inadequate and what was deemed impossible will occur: an EU country will default.  In the meantime, vultures are circling the obvious candidates and do not be surprised if the next headline involves the state of European banking  or one or two individual banks who are faced with real difficulty.

The ramifications?  All thoughts of the Euro as an alternative to the dollar will be, to understate it a bit, put on hold.  The realization that this is not a political union but a gaggle of politicians will come to the fore.  The chance of massive capital flight or repositioning of capital away from Europe is very real and the gap between Germany and the rest will widen to the point where it may be politically impossible to rationalize to the German people why the EU is good for them.  This is a very, very awkward time gang and one in which this country is not in a position to play any sort of leadership role even if this mob in D.C. had a clue.  One thing they should keep in mind, however: M. Trichet is powerless because he needs 16 politicians to agree with any of his pronouncements.  The more "oversight" by pols over a supposedly independent central bank, the more paralysis one creates in times when action is required and needless to say (or perhaps not) the entrance of politicians is concurrent with the exit of credibility.

Looks like a hung parliament in Blighty.  This is going to be a kick.


See you tomorrow