HEAD FAKE

...and it was a beaut. Got me too although I kept telling myself that this can't be the J.C. Trichet I knew. When it appeared yesterday that ol' Jean Claude had thrown his chips in with Brother Ben as to a QE II operation involving Euro soverign debt the markets went crazy. But today it was, "Mais non," just un petit speaking from ze coure as to what he has learned in his many years. Everything went half nuts the other way and my faith in M. Trichet has been restored. Trouble is he doesn't make mistakes like that except on purpose. The purpose? Beats me. Gotta think about that one...but not for long.

Anyway, back to the very clever Hugo Dixon of whom we spoke the other day. In this remarkable short piece, Mr. Dixon also has this to say:

"Governments, meanwhile, differ from banks because they do not finance themselves through deposits. However, they do need to continue rolling over debt as well to pay for new deficits...The lack of stable financing is why the Spanish government is vulnerable...it needs to attract large inflows each year from abroad. The government's habit of financing itself with relatively short term debt--it needs to refinance 149 billion Euros next year--makes it susceptible to the markets.

"Financing instability does not just cause crises, it also forces bailouts. It is usually thought too risky to let a bank (or government) go under, because the creditors who get hurt will then withdraw their cash from other banks (or governments) with similar profiles.

"This is what happened when Lehman was allowed to fail...

"It is about time policy makers did something about financing structures that invite liquidity problems."

Spot on Mr. Dixon. He goes on to note that the Euros have moved somewhat in that direction with Basel III but not until 2018. He also points out that the U.S. has not. What he does not mentioned, however, is what I have been saying over and over. Liquidity is key but liquidity comes not from regulation or reserves or higher taxes; these are simply the cost factors of doing business. One can be sure that if the payout on the other end is sufficient the costs will be absorbed and in an envirorment where all of the meaningful players are fewer in number and larger in size one can be certain that the reward will be there...or will be created through---let us say--mutual understandings. Rather, liquidity is the result of trust and belief and you might ask yourself who in their right mind would trust chairmen like Frank and Chris the Crook to craft legislation to be implemented at a later date by legislators dominated by Washington lobbyists at the behest of financial managers who fell in love with their own formulae and left reality to blow in the wind? Who now trusts the Federal Reserve which day by day becomes more and more political and about whom a noted blogist said the other week contains but one individual that is fully trusted by international financial institutions. I could state the name but you would not recognize it. Protect and preserve liquidity? One guy? Boy, he better be good.