In These New Times

A new paradigm for a post-imperial world

Euro Momentarily Stabilized — German Ban on Naked Credit Default Swaps Is Working

Posted by seumasach on May 23, 2010

Webster Tarpley

21st May, 2010

Tuesday’s German ban on naked credit default swaps – a measure repeatedly demanded by this web site over recent months — has been in effect now for about three days, and it is working. The panic slide of the euro has been stopped for now, and the forces of depression and destruction have been re-directed against US stocks, commodities, and certain emerging markets. The goal of euro stability has been momentarily achieved. Sarkozy, who talked a good game of limiting speculation, has been exposed as a Euro-wimp, too weak to buck the Anglo-Saxons and go along with Berlin. The Germans had to act alone because of the obvious sabotage of the eurogarchs of the Brussels Commission, which is now promising to come up with their proposal by October (!). Given the ferocity of the hedge fund assault, many Europeans by October will have lost their shirts, and will be living under bridges dressed in barrels, if more measures are not taken this month.

The German ban on certain derivatives marks an historical watershed, the first time in decades that a major economic power has acted in overt violation of the implied rules of financial globalization, rules which pertain to the hot-money casino system which has dominated the world since the early 1990s. German Finance Minister Schäuble appears determined to press on in the fight against the speculators with or without the Euro-wimps and the US-UK pro-derivatives bloc. On the eve of the EU finance ministers’ meeting held today, Schäuble told reporters that markets were genuinely out of control, and that the German government intended to regulate over-the-counter derivatives. He intends to take this effort to the G-20 meeting in Canada.

“I’m convinced the markets are really out of control,” Schäuble said. “That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.” Risks and rewards were currently “completely unbalanced,” he added. “We need transparency for all market participants.” Therefore, Schäuble said, over-the counter transactions need to be regulated. Furthermore, attention must be paid to the ratio of financial transactions to the real exchange of goods and services. “They bear no relationship to each other,” the minister said. “But, forgive my saying so, minimum profits of 25 per cent are simply unimaginable in the real economy. It isn’t healthy.” Schäuble was adamant that he would take the fight for a financial transaction tax (Tobin tax or Wall Street sales tax) to the G-20, even if he had no illusions about easy success. The chances for a Tobin tax were better inside the EU, he observed. (“Markets Are Really Out Of Control, German FinMin Tells FT,” RTTNews, May 20, 2010

The German urgent measures appear to have been timed to head off a planned panic stampede of hot money out of the euro being planned by certain circles in London and New York for the very near future. This was likely to have been a massive flight out of the European currency by hedge fund hyenas, zombie banks, and their allies in certain central banks. Many are familiar with the much-discussed scenario for a panic collapse of the dollar, starting from a young MBA working for a central bank in southeast Asia who decides to lighten up on dollars, sells a few hundred million of the greenback one morning, and sets off a snowballing cascade of panic sell orders against the dollar, which collapses in value before nightfall in New York. An intensified version of such a scenario was evidently ready to be unleashed against the euro. Some general features of the planned move are reflected in the article by Mark Gongloff, Alex Frangos, and Neil Shah “A Rising Tide Threatens Euro: Longer-Term Investors and Firms, Not Just Hedge Funds, Shun the Currency” (Wall Street Journal, May 20, 2010). Partly as a result of the German defensive deployment, this panic run on the euro appears to have been at least postponed.

The hedge funds were meeting in Las Vegas this past week, and a parade of these predators appeared on CNBC to voice the fear they said many of them felt. These are duplicitous subjects, but they all claimed that they were now in the process of “de-risking.” In other words, they were taking some of their derivatives bets off the table. Some of these may well have involved the euro, or else government bonds of countries like Greece, Portugal, Spain, and so forth. Any fear spreading among the jackals is a positive factor.

There were rumors at the end of the week about a massive short squeeze being silently organized by the European Central Bank to wipe out or severely burn the shorts who have been attacking Europe and the euro. This short squeeze or bear squeeze would take the form of large purchases of euro and Euro-bond futures by the ECB to fry the shorts. If the rumors are correct, there may be some mortally wounded hedge funds in the underbrush. If they are not correct, they are a tribute to the new climate emerging in the wake of the German ban. The European Central Bank would be very well advised to start such a short squeeze in any case.

There are two competing explanations of the current crisis. One is that we are seeing the crisis of the welfare state, with its modest provisions for the health, education, and welfare of its citizens. This is hogwash. The social safety net is everywhere frayed and threadbare. In reality, we are seeing the crisis of the globalized, hot money, casino economy of recent decades, based on speculation, derivatives, securitization, over-financialization, industrial and infrastructural stagnation, declining standards of living, union-busting, and cultural barbarism. This is the real explanation, and it is these degenerative phenomena which must be rolled back.

One purveyor of the barbaric anti-welfare state demagogy is Larry Kudlow of CNBC, a former Reagan Treasury official, who on Thursday announced his intention of driving a stake through the heart of the welfare state. In the same breath, the “free-market guy” Kudlow demanded a guarantee of all European bank debt and bonds – a massive bailout at public expense. This is the typical schizophrenic hysteria of the finance oligarchy.

Nouriel Roubini has somehow inherited the title of “Dr. Doom,” but he turns out to be a Pollyanna. Roubini talks of the present conjuncture as a double-dip recession. It is no such thing. It is the second wave of a world economic depression of cataclysmic proportions, which is likely to include the disintegration of the euro and the British pound unless a serious counterattack against the speculators is mounted soon. Roubini says that the cure is to cut spending and raise taxes – in other words, austerity and deflation. That, of course, is the same kind of crude reactionary nonsense which made the last depression so severe. In a depression, austerity does not work. It drives down production, drives down tax receipts, and drive up unemployment – ask Herbert Hoover and Heinrich Brüning. Even worse, austerity destroys the political system and opens the door to totalitarian solutions. The alternative is to attack speculation and prepare an economic recovery program through national credit creation for infrastructure projects and job creation.

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