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A Tale of Two Countries—The Iceland/Ireland Conundrum

If you saw the recent headlines only every other day, you might come away with the impression that the US economy is improving, unemployment is abating, and real estate values are rising. It’s a big fat lie.

The good news is only good compared to the most recent bad news which was actually much worse than it is made out to be.

There are two big lies: unemployment is improving and the European debt crisis will be fixed.

The debt crisis is actually a global problem of epic proportions that cannot be contained in Europe. The plan is to loan more money to countries about to default on existing debts. The very definition of pouring water on a drowning man.

Iceland was the canary in the mine shaft and is surely a warning of what awaits other nations whose prosperity was based on the avatar banking profits. The banking sector had grown to 10 times the size of its economy. And, no one laughed.

But, the people of Iceland, despite that they live in a place called Iceland, are smarter than we. They said, “You know what, we aren’t going to bailout our banks, we don’t want to.”

Ireland did the opposite and took on the banks debts.

More than three years after the two national governments made opposite decisions — Iceland only protected depositors, while Ireland also extended a broad guarantee to bondholders — the results tell the tale.

The three largest banks in Iceland defaulted on $85 billion. But, instead of underwriting the banks losses and saddling the tax payers with that debt, Iceland’s government capitalized a new banking sector from scratch that was free of toxic assets. See how easy that was?

Iceland has already returned to the financial markets. In February, Fitch restored Iceland’s investment grade rating, and its debt is 65% of GDP.

Ireland’s bank related debt alone is 40% of GDP and it is frozen out of the financial markets after saddling taxpayers with the losses.

Iceland’s jobless rate of 7.2% in the third quarter was half that of Ireland’s 14.4%.

Iceland is expected to see growth of 2%-2.5% this year, down from a near 3% pace in 2011.

As for Ireland, its central bank estimates growth of less than 1% in both years.

Iceland has been aided by a swift adjustment of its currency, the Krona, which boosted the competitiveness of domestic production.

In Ireland, by contrast, the euro has impeded its adjustment because its exchange rate is to a large extent determined by Germany’s economic strength.

Ireland’s government will conduct a national plebiscite on the fiscal compact, the European Union’s fiscal treaty, on May 31.

Approval is needed to continue to access a credit line from the euro zone’s sovereign rescue fund.

Irish households, facing huge debts and dismal employment prospects, may see the vote as a chance to shed bank liabilities and seek a Greek-like debt restructuring.

Leading up to the polls, one third of voters remain undecided. The voters rejected the EU Treaty in June of 2008.

In the end it may not matter. Austerity has proven to be an ineffective means of stimulating economic growth, In fact it suppresses it. Ultimately, voters will view continued failure as evidence of the European Union’s lack of legitimacy as a governing entity. It appears that a loss of confidence already exists.

Iceland’s path seemed radical and dangerous at the time but it has proven that letting banks fail is the only thing that works.

Spain also stands in stark contrast to Iceland. Like other countries, Spain has bailed out its banks and slashed government spending. As a result, the economy is now so bad that some are thinking of leaving the country altogether.

Then, on Friday, the Madrid stock market suspended trading in Bankia shares after an announcement that the countries fourth largest bank had lost 2 billion Euros and will need a further bailout. Does anyone see a pattern here?

This on the heels of JPMorgan Chase losing $2 billion, and MF Capital losing $2 billion, and it is obvious that what we are talking about is a banking collapse. The $1,000 trillion derivatives party that made bankstas rich was nothing more than a pyramid scheme. It’s a classic Ponzi plan.

The simple idea behind a Ponzi scheme is that new money covers payments to prior investors. But, new money is finite. Sooner or later there is no one left to scam.

When your “Marks” have already spent all of their pensioners’ money on mezzanine tranche synthetic collateralized debt obligations they have no casino chips left with which to play.

In the spring of 1980, “pyramid parties” swept California like a prairie fire. But, when the blaze had consumed all the fuel-fools, it just burned itself out.

One week it was a full blown orgy of cash with people showing up at private homes with bags of Benjamins and walking out with bigger bags of Benjamins. The next week local police were inundated by complaints from thousands of people who had lost money.

The fun really drained out of it when some homies from Compton starting showing up in suburbia with AKs and assuming the top position in the pyramid, awarding themselves all of the cash, and watches, bracelets, earrings and driving off in the victims cars.

I was mercilessly recruited by damn near everyone I knew to get my cash and show up at this address or that and get my share of the free money. People were very frustrated by my ignorance and seeming unwillingness to accept this blessed prosperity.

I don’t necessarily have a resistance to free money, if there really were such a thing. But, everything in this life comes with a price, especially money. Two words, Jack Whitaker. http://en.wikipedia.org/wiki/Jack_Whittaker_(lottery_winner)

The choices we make are based on what we value. We aren’t born with a value system; it evolves over the course of a life time, for better or worse. Part of that process is doing things that, upon reflection, we don’t feel good about.

Part of my philosophy argues against unjust enrichment. I don’t want something for nothing; I always find out later that I can’t afford it.

The other problem for me is that it still seemed like gambling. I don’t gamble. It isn’t a moral issue with me; I just cannot stand to lose.

Bankers built a massive global pyramid and the losses will be staggering.

They have now run out of new money to cover up the unrepayable debt. Collapse is eminent. The banks have no way of concealing their insolvency. By the time this is published, there may already have been a run on the banks at least in Greece and Spain.

The bankstas owe each other more money than exists on the planet.

In the US, a full blown election campaign is well under way. Now, and only now, has there been even minimal emphasis on the economy other than the rhythmic drum beat demanding austerity.

I’ve got some news for these fellas; things for the middle class are already pretty austere.

Everyone seems to agree that there can be no real improvement in the general economy without the immediate creation of at least 5 million jobs.

Everyone seems to agree that big business will not hire now and is hording cash.

Everyone seems to agree that small business cannot expand without capital.

Everyone seems to agree that banks aren’t lending.

Everyone seems to agree that only the Federal Government can create anywhere near the number of jobs needed immediately and over the next ten years.

So, what are our 535 congressional servants doing about it?

Remember last summer when the President went on vacation and said that he would introduce a brilliant and bold new jobs bill with a foundation of hope and change when he came back in September.

I asked then and I ask now, what are we waiting for? He lobbed congress a tepid proposal that would create only a handful of jobs, and they would not even pass that. So, now what?

It is now deep in May. Do the 535 know that when you do not have a job, thirty days is too long? Sixty days, an eternity? Ninety days and you turn to crime to feed yourself.

But look, there is nothing on the horizon. No plan. No discussion. No sense of urgency and the candidates aren’t even talking about it.

Meanwhile, the collapse of the Euro is only being delayed by a massive infusion of borrowed money. Explain to me how that will help?

Right now, European countries cannot make their debt payments unless they borrow the money to do so. The problem with that is that there is not enough money on the planet to cover what has already been borrowed, let alone lend any more.

But, who in their right mind would loan more money to someone who could never pay it back? Why the American tax payer, of course, by guaranteeing all banking losses. Bankstas take obscene profits earned through illegal activities and push all of their reckless losses onto the tax-payer.

That is what they refer to as capitalism and a free market economy. Heads we win; tales you lose.

The TBTF bankstas have over collateralized derivatives by possibly a factor of 100 to 1, and if the Euro goes down the bankstas will go with it.

So the Federal Reserve, in service to the banks that they abet, is printing US dollars and shipping them overseas just as they did to the tune of $16 Trillion during the last crisis.

When they blame lazy Americans for the countries debt, they hide the fact that this is the biggest contributing factor, not government spending.

In the meantime, we have learned that bailing out banks will continue to delay the global economic recovery we desperately need.

Combined with reduced government spending and mandated austerity, bailing out banks is the very best way to maintain the status quo.

Which path will we choose? Iceland or Ireland?

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