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As the World Crumbles: the ECB spins, FED smirks, and US Banks Pillage

Often, when I troll around websites of entities like the ECB and IMF, I uncover little of startling note. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic - an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it'll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then… see where I’m going with this.

We're doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation - it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It's not the 'inherent' weakness of national economies that a few years ago were doing fine, that's hurting the euro. It's the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not 'necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn't pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set. 

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back--blood from a stone.) The same kind of thing happend in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany - in different degrees and with specific national issues mixed in.  Problem is - when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending seize up, you’re screwed - or rather the people in your country are screwed.

In the IMF paper, the authors convincingly make the case that it wasn’t just the US subprime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don't-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase's acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the subprime betting train slowed down.

The first fatal stop of the US bailout mentaility was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB's Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time. 

After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country.  More 'fiscally conservative' governments are replacing any semblance of population-supportive ones. The practice of  extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threathen the entire Euro experiement, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It'd be just sooo catastrophic.

In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and "decisively" to provide a multi-trillion dollar smorgasbord  of subsidies for our biggest banks and look how great we  (er, they) are doing now? Seriously, Europe – get your act together already, don't do the trickle-bailout game - just dump a boatload of money into the same banks – and a few of your own before they go under  – do it for the sake of global economic stability. It’ll really work. Trust us.’

Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don't have much exposure - it's all hedged. (Like it was all AAA.) The press doesn't tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.

Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment.  Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained,  rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.


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Reader Comments (19)

The population is powerless to improve their situation - that is a mathematical fact. But they do have the power to change regimes, which they are starting to realize in the US, despite 100 years of isolationist and depressive marketing.
The details of the coming depression are interesting, but not important.
It is colonialism on a global scale, including domestically. The words change, but whether the banner is religion, nationality, or finance (respective human history), the song remains the same.
How to front-run?

November 21, 2011 | Unregistered CommenterWarren

Fantastic, Nomi. You're analysis is right on. The financial system will implode of necessity. There is simply insufficient growth to keep its debt game going. Debt being quickly devalued as I type, the financial firms will soon turn on themselves to devour for more profits, which will eventually leave but one to devour itself. That's a colourful way of putting things, and things will probably change non-linearly before that last spectacular self-devourization, but we will see probably considerably more squid vs. squid fights. MF Global is a low-scale version of that. It's got Celente pissed, among many trader-type others.

November 21, 2011 | Unregistered CommenterThomas

I saw you on RT. I also saw you on that Jesse Ventura documentary (great dress). You're very telegenic (that's the nicest way I can say what I'm thinking without being called a sexist jerk). You ever think of doing a weekly videopodcast??? Host it yourself. People say finance is largely dominated by males, but you could invite mainly female guests. It would be a hoot.

Janet Tavakoli, Gillian Tett, Yves Smith, Brooksley Born, Alice Rivlin, Janet Yellen, Elizabeth Warren, Dambisa Moyo, some female journalists. It would create interest and would encourage young women to be more financially literate.

Do you think it's funny that Gerald Celente and Bill Fleckenstein got burned trading paper assets??? I guess maybe it's a bit sadistic, but I cannot deny getting a charge out of seeing two guys who spend so much time giving others advice on buying (pimping??) gold in what could end up being a very deflationary period. I see Celente as very insincere/phoney, and Fleckenstein only slightly better talking his "book" (gold holdings). Maybe it's too easy to caste stones at a keyboard, but I try to call it like I see it.

November 21, 2011 | Unregistered CommenterTed K

YAY! for trolling ECB and IMF :D

November 21, 2011 | Unregistered Commenteranon

Nomi - I am finance literate and basically get the gist and then some, of your commentaries. I do, however, wish you would also write for the 'finance illiterate' portion of the population. Just the other day, I had to explain to my otherwise very educated friend, that the banks have NOT returned all of the bailout monies with profit and that Tim G. and Obama had not successfully dealt with the Fin. Sector crisis!

Keep up the good work!

November 22, 2011 | Unregistered CommenterUMABIRD

It will take torches and pitchforks before we can finally rid ourselves of these parasites.

That is why there is so much focus on Greece: The EUSSR is testing what they can get away with, ignoring democracy, the police state, the vassal state, placing fascists in the government of said vassal state, f.ex. - because "they" will eventually want to do the same measures on a much grander scale, in the entire EU, when the "contagion" spreads.

In the other half of the field, many people hope that the Greek rioters will manage to sabotage any extraction of ressources, thus blowing up German and French banks, and hopefully the EURO and the EUSSR itself - now that we know exactly which side it is on!

November 22, 2011 | Unregistered Commenterfajensen

Thank you for speaking out, Nomi ! Your efforts are respected & admired. The American Citizen, elderly & youth, deserve better than this from "our" government . p.s. Great new book, highly recommend; i couldn't stop reading it !

November 22, 2011 | Unregistered CommenterLynda Scott

You hit that one right outta the park Nomi - just about says it all, fantastic read !

November 22, 2011 | Unregistered CommenterNuYawkFrankie

Great stuff! Niggling comment: para 9, line 12 - Lending doesn't "cease" up, it "seizes".

November 22, 2011 | Unregistered Commenterjrn

Wonderful to have discovered you with this piece!

(I usually go to Naked Capitalism when I need to take a pulse on this kind of thing, and I think I liked over here via their link to Jessie's....)

This piece ties together some stuff that has been in various slush piles in my brain. The horror of creeping applause in the press for 'austerity,' the understanding of what "the usual IMF riot" means, the memory of the "IMF Hitman" book. But the normal media provide so much noise, sometimes it feel like wading though poisoned oatmeal trying for a few nuggets of news.

This was more like a fine sushi roll with fresh crisp ingredients, lots of wasabi, and nothing extraneous.

November 22, 2011 | Unregistered CommenterEvelyn

Jim - thanks for the correction...
Evelyn - thanks for the sushi comparison - especially following poisoned oatmeal :) ... I've gone to get information from Naked Capitalism many a time myself...

November 22, 2011 | Registered CommenterNomi Prins

You're self-avowed geeky (mathematical) so I thought you might enjoy taking a walk through these thoughts from back before things became quite so in our face 3rd-worldization USA. You can see I wrestle with concepts, seeing how they fit together, looking for the 'big picture.' So if I am overlooking something and you see it, I would love to know....

Strange attractors and massively unstable systems

(Written in April 2008, abbreviated today)

Recently I have been delving into the way Global Warming can produce unpredictable and surprising results.

The best model that came to mind for modeling some of these consequences involves chaos theory.

... the planetary temperature system seems to be relatively stable in two states -- glaciated (ice ages) and the friendlier climate we've been enjoying for pretty much the last 11,000 years. There are many factors that determine which state the planet is in. Sometimes they can reinforce each other, either to maintain stability or forcing change, and sometimes they work against each other -- for change or to reinforce relative stability.

Most people understand what a self-reinforcing cycle is. Feedback gets going and drives the system into a loop that is hard to withdraw from. And many people have some notion of what a "tipping point" is: when a system goes from relatively stable with some perturbation into a recognizably different state. When a system if forced out of a state of equilibrium and into something else.

We recognize that these influences work on financial systems, in the form of "runaway" inflation, for instance. There is a point where a self-reinforcing cycle takes over. Say you have a lack of confidence in banks, and it turns into a RUN on the banks. The system crashes.  
There are also deflationary cycles that feed on themselves, creating the mire of depression, where no one can buy anything because money has stopped circulating because no one can buy anything.

What most people have a harder time conceiving is_ multiple_ states of relative stability.


Chaos theory has a term for these states of greater probability: strange attractors. These are represented on graphs or mathematically as areas where a system likes to "hang out" more than others. You can't predict exactly what a chaotic system will do at any given time, but you can calculate probabilities. Based on probability, you can calculate something like "there's a 10% chance that it will be raining this Friday, at any given moment during the day."

Another way to model strange attractors is -- let's visualize a shallow copper dish, which we take a ball-peen hammer to and create a couple of depressions. So there is a relatively smooth surface with a couple of low spots in it. If you put a few BBs into the dish and swirl them around a bit, when they come to rest it is probable that you will find BBs in the low spots, and not in the higher areas. If one of the low spots is bigger or deeper, there is a greater probability that BBs will wind up in it.

So it is with climate. Stability is not unipolar. When instability occurs (when a tipping point is reached), the climate system goes into a chaotic state, and the outcome acquires a lot of randomness. But the probable outcomes are likely to be one of the two favored states -- the "strange attractors." Those states are "downhill" for the system, states in which it easily stabilizes. The tricky part is that it is impossible to predict which of the two attractors will "win the system over" in any great toss of the dice, in a massively multifactoral system.

All these years I have been going kind of nuts trying to figure out whether we are headed for rampant inflation or depression, what kind of out-of-control behavior will wreck the train of US finance. I read articles from a few years ago making very cogent predictions of a meltdown in the form of deflation, because of what was going on in the bond market at the time.

We do know that the system is massively unstable at present. There has been an artificially low interest rate for a very long time, which gave rise to symptomatic "bubbles" of excess liquidity and cheap debt. There is massive US debt to other countries, with an artificially maintained wall between a tall pile of dollars that wants to come tumbling home and the low-land of the US economy itself. There is the huge "dark matter" play-money of derivatives, which is the tail that can wag the dog of the US economy as soon as it crashes, and it can because it is so leveraged that it is much BIGGER than the "real" economy.

So we know what kinds of self-reinforcing "spin cycles" an economy can tumble into. For years I've tried to figure out -- which one? Which is the "logical" outcome? I have been thinking in a much too simple, linear manner. I realized that the same chaos theory applies, in spades, to economics as it applies to climate.

A few years ago when things were looking grim and uncertain -- stocks were still ridiculously overvalued, bonds paid next to nothing, and the smart investors pulled their money out and waited in a "cash" position. But what if CASH itself looks like an unsafe position!?!?

And the economy is global these days. It was enough so even at the time of WWI that the US economy hurt itself in responding to England's post-war pain by creating an artificial interest rate for England's benefit. That was a factor that contributed to the great depression here. Now, it appears that there are forces trying to keep the dollar afloat relative to other currencies, because so many people hold these wretched US dollars.

Its just like the bad paper that US banks are holding. They don't dare do a "Mark to market" on the subprime loans they hold. They are all pretending they are worth what they say they are on paper. If the debt were adjusted to show their true value, the banks would be bankrupt. Our own government has been analyzed as equally insolvent. At any rate, the forces keeping global finance "in balance" are looking pretty precarious.

But what happens when something gives way?

The system goes into chaos.

What is the probable outcome?

The only way I can think of to answer that is to try to figure out what kinds of states are historically stable for economies. Economies of human-made fiat money are relatively new. But ever since coins were invented, coinage has been debased. Inflation will be with us always. The way our economy is set up, it can't exist without inflation. So that is one pressure.

Another thing that always seems to happen is inequality. Some gangs of sonovabitches always seem to be on top, controlling most of the loot and keeping it away from much larger masses of poorer people. At least, whenever there has been wealth of any kind. Poverty distributes itself among the poor. But riches never distribute themselves randomly.

... forces at work, warring from the top and bottom to distribute wealth. Those at the top have enormous power and leverage to suck money upward, into their tiny tip of the pyramid. Those at the bottom are plentiful but weak. Their efforts to suck wealth downward seem to reach only into the class in the middle between the very rich (who are nearly invulnerable) and the very poor.

The middle class is what seems to be the most delicate -- perhaps nearly expendable -- part of the system.

What you might visualize is the wealthy wanting a skinny, pointy topped pyramid, and the poor wanting a short, squat distribution with a very broad base. The middle part gets sucked inward.

Basically, the middle class is relatively unnatural. There have been masters and slaves, lords and peons, since around the time agriculture got going well enough for some people to want to force some other people to do the farmwork. And when there is an accumulation of significant wealth, a middle class arises to so business with the upper class. Traders bring things from far away. Doctors heal it, poets entertain it, teachers to tutor its children, lawyers help it sue its neighbors. With very great wealth, some of the goodies and privileges trickle down. Freed slaves get slaves of their own. In the US, even people who live in trailers, in the US, can go to Wallmart and buy wonderful things made in China for them to wear or entertain themselves with.

But that's all kind of optional. Kind of a fluke -- not only in history, but NOW, for the great mass of people living in "third-world" conditions. We have obese poor people. That's weird. And artificial. As artificial as the fiction levitating the US economy.

We've lived with so much peace and plenty. ... how different it is that the US has wars that are far away from its borders. We don't experience war, we don't even think of it most of the time. It's hard to really believe it's even real. And starvation is too. It happens somewhere far away to other people.

The forces that want to continue sucking money upward to the tiny group at the top are not neglecting the US, however. Third-worldization is underway. Well, we can call it globalization, but all you have to do is think about the comparison in hourly wages between the US and other places -- true free-market globalization means we get to think about the fact that average wages in China are 1/40th of the wages here. The multinational companies currently sucking the wealth out of whatever countries they can are not sparing the United States. There is a huge money drain flushing into the Iraq conquest, which is moving money through to destruction on a vast scale, but siphoning enough off to be hugely profitable for a few well placed people.

So -- after the Chaos happens, I don't know. I can't even predict_ when_ the system reaches a tipping point, any more than I can when there might be an abrupt climate change.

But whatever it is, it probably will tend to make the US more like the rest of the world.

November 22, 2011 | Unregistered CommenterEvelyn

Fantastic thoughts, Ms. Prins, and while I agree with everything you said and have said in all your books, I think one line:

"The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks."

might not be necessarily completely on target.

True, it does appear to be the case, but in drilling down a bit deeper historically, this might very well be summed up by stating that in the 1920s there occurred an ultra-leveraged run, ending with the Great Crash of 1929, and in the present, another ultra-leveraged run by the bankers took place (at the start selling $60 - $100 dollars of debt for every $1 of debt on hand, then working upwards to a $1,000:1 ratio, utilizing endless credit derivatives and CDS schemes) beginning around 2000, with the meltdown starting in mid-2007.

Unfortunately, they appear to have almost immediately restarted another ultra-leveraged run, differing from the 1930s, when the ended securitization in the same year they ended Prohibition, 1933.

Thanks for the link to that IMF report.

The final days announcement?

My humble anti-talking point for the day:

The constant talking point, Wall Street/neocon meme heard repeatedly over the past 9 months:

"If all the money was confiscated from all the rich people, it still wouldn't make a dent in the national debt."

Oh really? Negative on that, neocon swineherds.

If all the billions were confiscated from those debt-financed billionaires ($7.6 trillion), who sold hundreds of trillions of dollars in securitized debt, plus their trillions (conservative estimate: $12 trillion) parked offshore was also confiscated, the monies would not only wipe out the national debt ($15 trillion) but leave some spare change as well for the masses.

November 23, 2011 | Unregistered Commentersgt_doom

"Powerless serfs". True in Europe, where the everyday people submitted to the Gun Control long ago. Not in the USA. The NRA alone is an implicit 5-million strong militia, and there are many others of like mind. Soon enough, as the System crumbles, the Crony Capitalists/banksters will Gold Grab, and the State Socialists will Gun Grab. All failing regimes do these things. This will be the Flashpoint.

November 27, 2011 | Unregistered CommenterCompassionateFascist

One of the posters above, TedK, suggests a videopodcast together with some great names (Janet Tavakoli, Gillian Tett, Yves Smith, Brooksley Born, Alice Rivlin, Janet Yellen, Elizabeth Warren, Dambisa Moyo).

You, and some of those, have been on Max Keiser's show. I think it's a great idea!


December 19, 2011 | Unregistered CommenterDavidC

A postscript - I didn't agree with TedK comments about Gerald Celente. Celente had been building a position in order to take delivery against the December contract with another broker (I've forgotten the name for the moment). The broker was taken over by MF and his position and money were STOLEN from him. He wasn't burnt by trading the paper assets, his money was. literally, stolen.


December 19, 2011 | Unregistered CommenterDavidC

David and Ted - yes, that would be a quite collection and I'd be honored to be associated - I wonder if there's a way to do simultaneous podcasts - but like Brady Bunch style......

As for what seems to have happened to Celente - his funds were stolen - used elsewhere - so whether paper or assets or cash - it seems like he couldn't have done anything about it - and that's more the point of the scary way in which financial firms can engage in quasi protected embezzlement.

December 19, 2011 | Registered CommenterNomi Prins

Nomi, your knowledge of big finance is faultless, you couldn't define the trail of corruption any clearer yet congress continues to pretend it isn't so. Am curious to know why you've turned? I mean at GS you had it all, did the squid culture fail to deaden your conscience?

January 12, 2012 | Unregistered Commenterspecwiz

This "crisis" we are in appears to operate only in the west? Howcome? Is the cause democratic? Political? Religious? What of the above have not infiltrated , penetrated , sabotaged the east/
Gold was the standard to limit and back the currency. That security has been removed.
What supports currency now? Terror? fear? police?mafia? politics? religion? ILLUTION?

The incredible Nomi Prins will no doubt help us in diseminating this enigma. I must confess a great admiration for this young lady.

January 13, 2012 | Unregistered CommenterJohn
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