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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
June 27, 2011
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If this were a sound recovery – fueled by balanced growth, strong capital investment and financed largely by relatively stable bank finance - I’d be a lot less worried.  But we’re instead in a quite shaky recovery incited by massive fiscal and monetary stimulus – which spurred excessive risk-taking, speculation and general financial excess.  Real economic adjustment was put on hold; the system has been set up for disappointment.  And with bank lending stagnant, the vast majority of system credit creation is coming these days from the issuance of marketable debt.  The markets had already moved to impose austerity on the municipal bond arena, and it appears the booming corporate debt marketplace is now facing an abrupt shift in the liquidity backdrop. 

“Extend and pretend” and “kicking the can down the road” are now bandied about when discussing the policy approach to the Greek crisis.  Virtually everyone believes that policymakers will –heroically in the final hour – come together, end the brinksmanship and craft a policy response that avoids even a technical default.  German Chancellor Merkel peaked into the abyss and saw the light – just as the markets presume politicians and central bankers will do.  There will be no “significant” contribution (aka losses) to bondholders, with Ms. Merkel agreeing instead to a voluntary participation from private creditors. 

The problem is the market has no appetite for Greek debt – and it doesn’t want the debt of Ireland or Portugal either.  And it wouldn’t take all that much for the marketplace to take a cautious approach to debt altogether.  At this point, there’s little that can be done to make this problematic periphery debt appealing to the marketplace.  Meanwhile, the Greek populace has taken a lot of pain – and will be told to endure worse – without seeing any positive results.  The whole process has lost important credibility, which could mark an important inflection point for the markets.

Global markets have enjoyed a bountiful year of policy-induced gains.  Policymakers, once again, emboldened those believing that governments can solve debt problems and easily intervene to bolster financial markets.  This backdrop has, at the same time, provided quite an opportunity for market participants to hedge risk in Credit default swap (CDS) and myriad other derivatives markets.  At the end of the day, the flurry of hedging and speculating that arose when subprime heated up in ’07 embedded risk exposures that came back to haunt the system with Lehman’s collapse.  And, I’ll wager, many of the institutions at the heart of today’s booming global risk-intermediation and derivatives markets (including CDS) are heavily exposed to Greek and periphery debt. 
Expanding debt impairment is becoming a major problem; there’s no apparent default mechanism that wouldn’t imperil many of the world’s major financial institutions; and the tentacles of this potential crisis reach far out across the global system.  “Extend and pretend” is the new normal, as global markets become a politicians and policymaking confidence game.  Europe – and the world’s – new “Lehman Moment” commences when the markets question the soundness of the global derivatives marketplace.