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Saturday, November 19, 2011

Who's to blame?

 Europe is coming apart at the seems.  No, actually, from the center.

The banking crisis that began in 2008 with a mass of bad mortgage debt was momentarily assuaged by many trillions of taxpayer dollars administered to Fannie and Freddie, AIG, Goldman Sachs, and a host of other banks, as the Fed took many more trillions of bad debt onto its own balance sheet.

Unfortunately, we're only just finding out now (we - the unsuspecting public - many other knew) that the crisis was far worse than we imagined.  Many trillions more of this bad debt were marketed to Europe by Goldman Sachs et al and then resold between the European sovereign banks.  On top of that, Goldman Sachs et al were busy helping insolvent European governments hide their debt in off-balance sheet swaps so that they could gain entry into the EEC.

Yes, this is a European "Sovereign Debt" crisis.  But so much of that debt is mixed in with bad mortgage debt that is still intertwined with the Fed and the US Banking system that a collapse of the Euro will undoubtedly bring down much of the US banking system.

And China depends on the US and Europe for about 60 percent of its GDP.

So there's a huge impetus for both the Fed and China to step in here along with the EEC and backstop all this - again with taxpayer money.  (Or by printing money - which amounts to the same thing.)

 So who's to blame?

The Republicans would have us believe that there's plenty of blame to go around.  Starting with those poor folk who lied on their mortgage applications, and the corrupt politicians that supported Fannie and Freddie.  Yeah, sure.  Lying is wrong.  And Fannie and Freddie are grossly incompetent and corrupt.

But that's not what brought down the world banking system.

The OWS crowd blames corporate greed, the banks, income inequality, political corruption, and the general unfairness of life.  All that may be true too.  But we need to understand what's happened here.

Until 1970 all debt in the world could be settled with a demand for gold in payment for that debt,  This limited the amount of debt that could be created.  When Nixon closed the gold window for US debt, the world banking system was cut loose from any sort of responsibility to tether debt creation to hard assets.  What has resulted is in inconceivable tsunami of debt.

The big Wall Street Banks like Goldman Sachs are filled with very smart guys.  They spend their time thinking up ways to create garbage debt and sell it to everyone else.  That's all they do.  Because it's vastly profitable and unregulated.  Because they can.  Even the vast majority of "Mortgage Debt" have NO UNDERLYING MORTGAGES.  That's why they can't be unwound.

There is no solution but to tie money - and debt - back to a hard asset.  Back to gold. If it is settled in gold it limits the creation of debt to the amount of gold.  And it measures the debt by the price of gold.

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