The Bumpy Road To Fiscal Sustainability

So I was wrong about Europe. My doubts about the ability of Europe's leaders to actually come up with a realistic debt solution were averted yesterday with the announcement of a plan to take the necessary steps to avoid a Greek default with immediate, yet temporary and uncertain, relief by ordering Europe's weak banks to raise more capital to protect against future payouts to investors via credit default swaps and ease fears, for the time being, about the possibility of bailouts for Italy and Spain with the $625 Billion bailout fund called European Financial Stability Facility. The stock market was eagerly awaiting the outcome of this decision and the announcement of hard numbers to be thrown on the debt crisis fire which in recent weeks was verging on an uncontrollable wildfire. All a result of bickering amongst Europe's leaders about which wealthy country would bare the brunt of rescuing its debt crisis and investing in the E.U.'s future....sound familiar?

And boy did the market respond upon hearing the numbers that came within earshot of what every economist and financial reporter said were needed. As better than expected third quarter reports from American businesses recording unexpected profits and exceeding quarterly expectations coupled with signs that our economy was growing amidst recession fears (GDP grew 2.5%, consumer spending rose 2.4% in 3Q, as jobless benefit claims declined last week) the Dow Jones Industrial Average rose 339 points and October is on pace to be the biggest monthly percentage gain in nearly 25 years. The very definition of Bear to Bull. The Euro also rose yesterday to $1.41 on the dollar from a low of $1.31 earlier this month.

But here is the biggest news and most important thing to be aware of. Private sector big banks, who originally agreed to 21% "haircut," agreed on Thursday to accept a 50% loss on their credit default swap holdings of Greek government bonds. This is fucking huge. Big banks actually being held accountable by European leaders and agreeing to take a loss. While Greek losses are relatively small in comparison of other credit default swaps this is still very significant and one can make many broad conclusions of where things can go from here. For one, this will cause investors to seriously consider the value of European bonds and the security of payouts should they default. Which in turn, if our Congress (with a 9% approval rating) and the super-committee can actually put country over politics in a lame duck season and come up with a bold debt plan by the Nov. 23 deadline, the implications of its success take on a whole new meaning and coincide with the momentum of the European debt plans and could potentially be turning point for our own economic recovery.

Here's why. The result of these actions abroad will now cause the default insurance market to plunge, vindicating our own 2008 predatory sub-prime mortgage housing crisis which was the result of big banks like Citibank, Goldman Sachs and JPMorgan Chase selling investments, made out of mortgage securities, to their own customers and then in turn betting against them via derivatives, and making huge profits when the housing bubble burst and homeowners defaulted on loans.....as the taxpayer picked up the tab on the bailout payments. This whole system is flawed and the SEC, thanks to Congress, has barely been able to implement any real regulations on the banking industry. So by the simple act of the big banks agreeing to the 50% loss (which I assume was made because the result of that minor loss would be negated by the profits made with the success of Euro bailout news and plugging the hole in the dam of continued Greek debt losses which would only grow larger) all in the name of a short term solution. This will have a profound impact for months to come (and I imagine send the market back down soon enough) and will end resulting in a symbolic self-regulation domino effect ultimately making these investments no longer profitable and eventually fade away into a long list of financial crimes of the past.

However, in the short term, before the flame completely extinguishes, I imagine a quick flood of investors flocking to 10 and 30 year U.S. government issued bonds which are at all time interest lows. Despite the recent downgrade, U.S. bonds are still a gold standard. Even if inflation rises in the aftermath of this recession, the long term yields and profits will out weigh any inflation caused by further potential government stimulus, as many foresee a third round of quantitive easing. And this is a great source of much needed revenue for the U.S government....but pulling back, it's a bit troubling that the only way our government seems to be able to generate new revenue is by selling its own debt.

So the fourth quarter has a lot to offer and surely will impact not only the 2012 election but also the pace of our economic recovery...like there actually is a difference between the two. We shall see how this affects American companies 4th quarter holiday season profits, jobless numbers, 2012 GDP forecasts, how banks react to finding themselves caught between a rock and hard place, but most importantly we get to witness how this impacts our politicians. The actions of Europeans leaders calling the banks' bluff and playing hardball, refusing to bail out the banks and call for further measures of austerity, is a source of great promise and hope for the prosperity of the taxpayer and middle and working class families. Their actions will surely fire up the Occupy movements at home and hold our own leaders to a new standard.

As Europe's leaders flirted with the high-bar of ineptitude firmly established by our politicians this summer, the great seed of fear was planted in the garden of nightmares. Not of a double dip recession or tumbling stocks, but something far worse, a rapid spiraling downfall of Medieval proportions into the depths of our own ignorance and selfishness—human beings not being to learn from their own mistakes, repeating failure after failure and allowing cannibalistic human greed to consume our own future as we merge into the fast lane on the highway to hell. Left turn merge diverted for now, but we still cruise along in the middle lane, well over the speed limit, as the holes in Europe's sovereign debt solution remain to be filled. With plans to reduce Greek debt to only 120% of GDP by 2020, we shall see what curves and bumps remain ahead on the road to fiscal sustainability.