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                       A GREEK TRAGEDY

      Bankers' Hubris Brings Financial Dominoes
             To Greece, Europe and America
By William Schmidt, Ph.D.




10-year Greek Bonds in Euros
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                                              "Gold Is Good"

             Gold is on the rise.  The fear of an entire country "failing" scares folks out
       of all currencies.  There is good reason to be afraid of a chain reaction of
       "sovereign" countries' debt problems.   The could destroy whole countries,
       as only a wars or civil wars, used to be able to.

                                                   GLD - ETF for Gold
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            The European Debt problems will almost certainly worsen because
       of the ballooning use of unregulated credit default swaps, the absence
       of any local currencies and the presence of so many angry, demonstrating citizens
       who do not find 10.3% unemployment acceptable.   Except for France, the heads
       of the Economic Union and all the countries that make it up are afraid of the big banks. 
       They simply endorse the International Monetary Fund's call for retrenchment and
       balanced budgets.  They avoid the real problems.   They should demand a universal
       criminalization of trading in credit default swaps.   But they understand the US
       would not enforce it. 

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            The heads of each of the EEC countries seem quite intimidated by the big banks.
        Except for occasional bouts of rhetoric against Goldman Sachs, they refuse to
        address the core issues.  Amazingly, a year and a half after the Crash of 2008,
        there is still nothing to stop sinister short-selling speculators from driving
        Greece and Spain into national bankruptcy, just so they can make a bundle.

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             Tourists should be flocking to see beautiful Greece, but since prices
             are fixed in Euros, the current financial crisis offers no extra incentive
             for travelers to visit.

                   The Dangers of CDS (Credit Default Swaps) 

In effect they allow you to buy fire insurance on your
                      neighbor’s house. This creates an incentive for you to
                      burn down his house.  Worse, where bankers used to only
                      be able to deny credit, now they can destroy credit
                     and solvency, too.

            How would do speculators do this? They bet on Credit Default Swaps.  Example.
        for a mere $282,200 a big bank could have bought insurance on $10 million in Greek
        government debt.  In February, the same CDS cost $40,000.  Now its price is $754,280
        for a year's "insurance."   Besides Goldman and JP Morgan, the biggest buyers of these
        are Credit Suisse, UBS, Societe Generale and Deutche Bank.  Specualtors trade these
        Credit Default swaps instead of a specifric Greek or Spanish currency, as in the past....

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           Here is the essence of a lonely US article about the dangers of the Credit Default Swaps.
     ( http://dealbook.blogs.nytimes.com/2010/02/25/banks-bet-greece-defaults-on-debt-they-helped-hide/ )

       "As Greece's financial condition worsened...a little-known company backed by Goldman,
        JP Morgan Chase and about a dozen other banks ...created an index that enabled market
        players to bet on whether Greece and other European nations would go bust...Last September,
        the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index,
        which is based on such swaps and let traders gamble on Greece shortly before the crisis.

            "Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus
        on their daily gyrations...A result, some traders say, is a vicious circle. As banks and others
        rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal,
        bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn,
        adds to the anxiety — and the whole thing starts over again...

           "(T)he French finance minister, Christine Lagarde, last week singled out credit-default swaps.
        Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
        Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the
        cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money...

            “It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at
        Amundi Asset Management in London, which has $40 billion in global fixed-income assets.
        “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models
        and forcing portfolio managers to sell Greek bonds.” If that sounds familiar, it should. Critics
        of these instruments contend swaps contributed to the fall of Lehman Brothers."
http://dealbook.blogs.nytimes.com/2010/02/25/banks-bet-greece-defaults-on-debt-they-helped-hide/ )

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The Lack of A Greek or Spanish Currency
                      Makes Matters Much Worse.

            There is a big and important change now.  Previously, speculators who were bearish
        on the financial safety of a country would sell short the currency of the weak
        country. As these countries' currencies declined, their economies were boosted by
        expanded tourism and exports.  Foreign companies would be attracted by the lower costs of
        labor and land in the country. In this way, there used to be a natural cushion against
        utter financial disaster.

            But Greece and Spain now no longer have their own currency. The EURO ended
        this and set the stage was set, as never before - except in war - for a total country
        financial collapse.  Of course, the the heads of the Economic Union and the Greek
        Premier call "absurd" any talk of national (sovereign) bankruptcy or the breakup
        of the European Economic Union.  But others like myself and the prescient economist
        from NYU,  Nouriel Roubini, disagree..  
                       Jan 27, 2010 - Roubini: Greece Bankrupt, Spain Next
                       Apr 27, 2010 - Roubini: Saving Greece Won't Work, Debt Crisis to Spread

             The problem, as I see it, is that the situation now can be turned into a tragic death spiral
        for an entire nation of millions and millions of people because of the utterly selfish actions
        of unregulated big-bank speculators, now, using in many cases, free US Fed money.

             What are the dynamics? Now when international corporations see a country in
         financial decline and under attack by credit default swap predators, they back away
         because there is no natural protection against bankruptcy.   Bailouts come at a
         high price. Greece's official unemployment rate is now 10.3% 
In Spain unemployment
         is above 22%
. IMF or central banker imposed austerity means even fewer jobs and
         less of a social safety net. High levels of civil unrest are now a certainty whenever
         the Greek government is appears to be kowtowing to these bank demands that the
         Greek government balance its budget immediately and cut back its social programs.
         The Greek Communist party is making a comeback.

             The media in the US blame the Greeks and Spaniards for living beyond their
         means. But are the poor and unemployed people there expected to starve while
         waiting for private sector jobs to appear, just so bankers can get still richer? 
         Banker imposed austerity will crush the poor in these countries.

The Greek “rescue package” is a seriously flawed financial plan. First, it is conditioned
            upon the successful implantation of a structural adjustment program that contains harsh austerity measures
            which will hurt workers, pensioners and the poor and dismantle an already scant welfare system. Greece
            already ranks among the most unequal societies in the world, with 20 percent of the population living
            below the poverty level, and its social services resemble those of an undeveloped rather than those
            of a developed country.

              "Further, the austerity measures of wage cuts, pension reductions and sharp tax hikes will
            depress spending and lead to severe job losses for an economy that is already facing double
            digit unemployment rates.  It is estimated that unemployment will increase by an additional 6 percent
            because of the EU/IMF imposed austerity measures and the GDP is expected, according to 
            official estimates, to shrink by 4 percent this year and by another 3% in 2011.

              "The contraction of the economy will add further to Greece’s debt problem. In two years from
                   now, the debt to GDP ratio will stand at 150 percent....In sum, Greece is being asked to implement
                  an amazingly harsh structural adjustment program which will only make the economy worse off and
                  cause immense human suffering but will still end up with an unmanageable sovereign debt crisis
                     ( Chronis Polychroniou - http://www.energybulletin.net/node/52830 May 17, 2010)

             Organized labor and their supporters will always fight this.  And that reinforces the
         death spiral.  Civil unrest is thereby guaranteed.  Greece already had one civil
         war, after World War II.  It does not need another.  But strife and agitation
         are inevitable in this economic climate. This further discourages foreign investment
         and causes the flight of private capital.   It would be very tragic if a military dictatorship
         resulted.  This is such a beautiful land. 

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                                   Greek Prime Minister - George Papandreau

            Were it not for these credit default swaps and the absence of an independent Greek
        or Spanish currency, a financial collapse might now be avoided and a bottom might otherwise
        be reached.  But Wall Street's Standard and Poor's cares not a wit about these dynamics.
        It gets into the act, the self-reinforcing free-fall, when it issues as it did today, an all too
        obvious and belated, but very public warnings that the Greek budget deficit has reached
        unsafe levels.  Who asks the key question?   Exactly, how is such a country to survive
        when investors not only pull away but now work aggressively against the country's efforts
        to solve its problems?

           Exaggerated?   Because credit default swaps have ballooned so much and yet are so
        completely unregulated,  we have to depend solely on big banking firms to tell us what their
        role was in bringing about the Financial Crash of 2008.  This is dangerously absurd. 
        There is too much risk for the countries involved and too little risk for banks using
         huge leverage and being reimbursed lavishly for using it to the fullest. Absurd?
         Of course, but Wall Street banks won't dare to admit just how pivotal and decisive
         their bearish role was in destroying millions of jobs and retirement dreams.

           To my way of thinking, just allowing credit default swaps to be traded seems
         to constitute costly and criminal fraud.   AIG sold them with impunity in quantities it
         knew full well it could not possibly redeem or honor if there was, indeed, a housing
         market collapse. That is criminal fraud! It knew it could not meet the terms of its
         contract when it sold the swaps.   And it very dangerous.  Speculators bought AIG's
         swaps then, just like they are buying them now, on Greek and Spanish debt, making
         the declines in these countries' economies much worse.   In America, the taxpayer
         bailed out AIG and the big banks.   If a series of countries fail because of how powerful
         these bear raiders are and how weak investor confidence is, who will make good these
         credit default swaps.  No one.   So, they are a fraud and should not be sold, even
         apart from their cruel consequences.

   OIbama's "Raw Deal"
Bear raids were made illegal in FDR's time. Not in Obama's time.  FDR brought
         the "
New Deal" to Americans.  Truman fought banks, too, and campaigned for
         a "
Fair Deal".  Obama shows every day he is a puppet of Wall Street.  He 
         gives Americans a "
Raw Deal".   His financial reform proposals leaves out all that "
         is important.  There is no breakup of banks too big to fail.  There is no separation
         of normal business and individual banking from hedge fund trading and speculation.
         There is no penalty for rigging markets.   Excessive computerized trading is not
         deterred or heavily taxes.  Windfall trading profits are safe.  No special tax on this
         asocial and dangerous activity by brokerages.  No criminal penalty at the top
         of brokerages for fraud, insider trading, front-running or manipulation of
         the markets.  Obama proposes that the Federal Reserve regulate "credit default swaps". 
         What a joke?!  This is the same agency that created, exaggerated and then refused to
         regulate the housing bubble.  The Fed loves big banks.  It is made up of bankers. 
         It happily encourages the manipulation of markets by big banks by giving them
         "free money" for "toxic collateral". 

              The NY Times opined:
DERIVATIVES are responsible for much of the interconnectedness between banks and other
            institutions that made the financial collapse accelerate in the way that it did, costing taxpayers
            hundreds of billions in bailouts. Yet credit default swaps have been largely untouched by
            financial reform efforts. 
This is not surprising. Given how much money is generated by the
            big institutions trading these instruments, these entities are showering money on Washington to
            protect their profits
. The Office of the Comptroller of the Currency reported that revenue
            generated by United States banks in their credit derivatives trading totaled $1.2 billion in the
            third quarter of 2009. Congressional “reform” plans for credit default swaps are full of loopholes,
            guaranteeing that another derivatives-fueled financial crisis awaits us"
http://www.nytimes.com/2010/02/28/business/economy/28gret.html )

              So, these bear raids and credit default swaps are neither regulated nor outlawed in
         Europe or America.  Not surprisingly, an organized international banker run on Greek debt
         is under way.    It could very well be successful.  It it is, there will be a chain reaction
         of short selling of the debts of Spain, Portugal, Italy, Ireland...and eventually the US!

            This is intolerable.   But none of our politicians talk about it.  And the media is
        silent.  What happens when the US stock market bubble ends and the very same
        bankers who are now hugely profiting from the current artificial bull market turn their
        bearish guns loose on the US Stock Market?   If history shows anything, it is how few people,
        especially those who enjoy political power learn anything from it.  

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            References - Greek Civil War: 1944-1949
  Greek Protests against Governmental Austerity Measures in 2010
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