Share on Google Plus Share on Twitter 6 Share on Facebook 6 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit 1 Share on StumbleUpon Tell A Friend (13 Shares)  
Printer Friendly Page Save As Favorite View Favorites View Stats   16 comments

Exclusive to OpEdNews:
OpEdNews Op Eds

How And Why Our Federal Reserve Has Been Forced To Bail Out European Banks

By (about the author)     Permalink       (Page 1 of 2 pages)
Related Topic(s): ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 1   News 1   Supported 1  
View Ratings | Rate It

opednews.com Headlined to None 10/20/11

Become a Fan
  (110 fans)
- Advertisement -

In 1999, the euro became official.   A year later, Greece joined up.   The Big Shared Illusion was that once countries adopted the euro, they wouldn't default.   They would limit their deficits.   Every country would become like Germany, where debt was highly secure.   So Greek debt, Irish debt and Spanish debt began to trade as if they were super-safe German or French debt.   Countries like Greece that had been considered dicey investments then became overconfident, based on this Big Shared Illusion (BSI).   The European Central Bank would take care of inflation, investors thought.   And surely no one could then go bankrupt.   The Greeks, once forced to pay high interest rates (as high as 18 percent in 1994), could now borrow at low interest.   Happy days were here again!

The second stage of folly, based on the BSI, was that the conservative Greek government went on a reckless borrowing spree, and the banks went on a reckless lending spree.   Big European banks were delighted to lend Greece money.   And, sinking deeply into the BSI -- or was it just selective inattention? -- more than a few banks eventually began helping the Greeks hide evidence that all was not well.   With the evidence kept hidden, more bonds could be sold to more investors, and that meant more commissions.   Alice had quite profitably stepped through the looking glass.

But then, as early as 2005, many of these big banks began to wake up -- they began to realize that the Greeks wouldn't be able to pay the money back.   But so what, some of them said.     It's called moral hazard:   you know your risky behavior is not going to be punished because somebody else is going to have to pay for it.   That's what the banksters counted on in the case of Greece, and accordingly they kept the rivers of money (generated from selling secretly-risky Greek bonds) flowing.   They were just making too much money at it, and couldn't stop themselves -- not when they knew they could get off, in the end, with little more than a slap on the wrist, while others would take the real hit for them.

So the Greek government was given the green light to borrow boatloads of money for their Olympics, which cost twice as much as projected.   Magician-bankers at Goldman Sachs obligingly helped the Greek government disguise the danger of the debt -- we're talking billions -- with clever little financial instruments called derivatives.   The public hadn't a clue what was going on, but who cared? -- Goldman was making commissions hand over fist on all these bond and derivatives sales.   So, all the southern countries on the euro-teat continued to borrow heavily (by way of these bonds that were being sold like hotcakes with Goldman's help) -- and spend heavily -- and for a while these little countries boomed, while all this newly borrowed money was being spent, and then spent again.   God bless the multiplier effect, and God bless banks like Goldman Sachs for helping make all this magic happen!    .

The sh*t hit the fan when the Greek government changed hands in October 2009.   The books were opened to the light of day, and it became obvious to one and all that there was a much bigger deficit than anyone thought.   Investors then ran for the hills.   Interest rates shot up.   In November, just three months before the Greeks became the epicenter of the European economic crisis, the wizards of Wall Street (a.k.a. banksters) were back on the scene in Athens, frantically trying to peddle still more derivatives deals, so that the appearance of the debt would magically vanish.   The New York Times summed up the banksters' role in the crisis this way:

"As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt.   Instruments developed by Goldman Sachs, JPMorgan Chase, and a wide range of other banks, enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere."

In dozens of deals across the Continent, banks provided cash upfront (i.e. loans) in return for government "payments in the future," with those liabilities then left off the books.   Example:   For big fat loans (i.e. bonds that were sold to investors), the Greek government traded away such things as the right to collect fees at airports, and the right to collect lottery proceeds (i.e. "payments in the future") . . for years to come.   In other words, Greece traded major sources of future government revenue, for big money NOW.   And banksters like Goldman encouraged this foolhardy undertaking because they were making so much money off of keeping the Big Shared Illusion going.   And damn the final outcome when the house of cards finally collapsed.   Others would pay the price, not banks like Goldman.

But with potentially destructive financial winds gaining hurricane force, it became clear that Greece would need a whole lot of money if investors in their bonds were ever going to get paid back.   So the government jumped on the austerity train to nowhere -- making draconian cuts in services, pensions and wages, which only increased their deficits.   And then they had to ask the EU for more money.   Public workers were fired in order to pay the banks their pound of flesh.   Then pensions were slashed to pay the banks still more.   But there still wasn't enough money to pay the banks all that they were owed.

- Advertisement -

==========================

If you're a country that has your own sovereign currency -- like the U.S.   -- then you have some options in such a situation.   You can do monetary expansion to head off deflation, for example, and devalue your currency.   But once Greece went on the euro, it said good-bye to such options.   So it cut, cut, and cut, but is now going bankrupt anyway.   The country is mired in falling incomes (that reduce consumer spending, thereby leading to layoffs and ever lower average incomes) and is also mired in rising deficits, and is therefore sinking ever further into what might be called the Herbert Hoover death spiral.

Meanwhile, members of the EU are flipping out.   Contributions to the bailout agreed to in July . . are supposed to be proportional to a country's economic status, and thus the Germans have the biggest chunk to fork over.   But most Germans are not keen on the notion of doing this just so that the Greek and French banks can get paid.   Hey, they're thinking, wouldn't it be cheaper to recapitalize our own banks directly?  

The French are really flipping out, because after the Greek banks, their banks ended up holding the biggest hordes of Greek debt (i.e. bonds).   So they're worried about their credit rating once it is widely realized that the bonds they are holding are essentially "toxic waste" that's worth maybe half of its nominal value, if that.  

The realization is dawning that this sh*tstorm is too big, and that the Greeks can't fix themselves.   So they may have to go bust.   And if Greece goes bust, that means the Greek debt will be written down, way down, to maybe half its initial value, or less.   Which means the Greeks would then only owe half the money they currently owe to the banks and other bond holders.   Thus all banks and other investors in these junk bonds will take it on the chin.   Hard.   And because these banks were in crappy shape anyway (despite their phony stress tests), the possibility of cascading bank defaults arises.

- Advertisement -

Thus the proposal to build a firewall around Greece, so that if it does go bust, everybody else will be protected.   (Good luck with that.)   And then wait "til the same thing happens in Portugal, Spain, and maybe Italy.  

In a nutshell, Europe is in the process of deflating and collapsing, in order to protect banksters.

Sadly, this doesn't have to happen.   The big banks could be taken over by the government, recapitalized, and their management fired -- FDR-style and S&L style.   Admittedly, this is unthinkable in the world of bank-centric, neoliberal economics, in which the banks essentially own the governments.   On the other hand, the anti-bank constituencies, on both the left and the right, are much bigger now than they were when the financial crisis began, and with the Occupy Wall Street movement spreading around the world by leaps and bounds, the banksters might be taken down after all.   So, will the banksters prevail, or will their victims, who are building their forces at warp speed?

Next Page  1  |  2

 

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon


Go To Commenting

The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Follow Me on Twitter

Contact Author Contact Editor View Authors' Articles
- Advertisement -

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Was Pat Tillman Murdered by an American Sharpshooter to Shut Him up?

New JFK assassination bombshells

The cholesterol - heart disease scam: How the medical-industrial complex is raking in billions at our expense

Two U.S. presidents implicated by ex-CIA black-ops assassin

Four Ticking Time Bombs That Will Soon Ignite a Revolution

The Ultimate Goal of the Bankster-led Political-economic Warfare Being Waged Against Us Is . . . ?

Comments

The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
2 people are discussing this page, with 16 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)

Ben Bernanke, chairman of the central bank, co... by Richard Clark on Thursday, Oct 20, 2011 at 1:46:27 PM
If every American sued Goldman Sachs individually ... by Jack Flanders on Thursday, Oct 20, 2011 at 5:13:26 PM
For the past two decades, according to a whist... by Richard Clark on Thursday, Oct 20, 2011 at 7:55:13 PM
To the list of mega-corporations bailed out by the... by Richard Clark on Thursday, Oct 20, 2011 at 11:55:13 PM
Eurozone banks are facing major potential loss... by Richard Clark on Friday, Oct 21, 2011 at 9:34:00 AM
Check out this article in the New Scientist: Revea... by Jack Flanders on Saturday, Oct 22, 2011 at 8:30:53 AM
<<< Maybe the whole notion that "capital ... by Richard Clark on Saturday, Oct 22, 2011 at 11:20:07 AM
Note that I said that finance is not essential to ... by Jack Flanders on Saturday, Oct 22, 2011 at 1:52:46 PM
The big banks have sold us out.Democrats and Repub... by Richard Clark on Saturday, Oct 22, 2011 at 12:39:39 PM
Recentlly reported at Bloomberg:   ... by Richard Clark on Sunday, Oct 23, 2011 at 8:47:58 AM
This is just amazing. $79 TRILLION??Where are the ... by Jack Flanders on Sunday, Oct 23, 2011 at 9:03:40 AM
Former Labor Secretary Robert Reich:Today Ben Bern... by Richard Clark on Sunday, Oct 23, 2011 at 8:59:26 AM
Our Federal Reserve Now Backstopping $75 Tril... by Richard Clark on Sunday, Oct 23, 2011 at 9:42:57 AM
If "our Fed" is backing these losses, and yet we d... by Jack Flanders on Sunday, Oct 23, 2011 at 12:44:44 PM
 I bet the same questions would arise in... by Richard Clark on Sunday, Oct 23, 2011 at 2:11:53 PM
A friend of mine pointed out that the FDIC on... by Jack Flanders on Sunday, Oct 23, 2011 at 6:03:33 PM