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The Markets Need More Merkels

12/21/2011 8:30 am EST


Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

If there were more tough-minded politicians trying to solve this financial mess than kick the can down the road, the bond and stock markets would be in far better shape, writes Marilyn Cohen of Bond Smart Investor.

While the stock market was crazy hot the last day of November, the European banking system was going down for the count.

 The European banking crisis reached its flash point, and if something wasn’t done quickly to shore up confidence, financial Armageddon would have overtaken Europe.

Several large European banks could not borrow dollars for their wholesale funding needs. So our Federal Reserve lent US dollars to foreign central banks and received their currencies in return for a predetermined period.

So, the Fed lent dollars—lots of dollars—to central banks, which then lent the dollars to their respective imperiled banks.

The Equity Market
I suspect the equity market took this action as a confidence builder because the European banking system was given more time to implode. So the central banks were able to relieve banking pressures temporarily.

However, the European private banks continue to be in jeopardy. Declining asset values, inventories of sovereign debt down in value, trading desks struggling to make money, Basel III (new tough rules on liquidity and capital) looking unattainable—those are just a few of the challenges facing the European banking system.

If you are a student of financial history or just read The Wall Street Journal, then you know such coordinated central bank interventions occur: The 2008 meltdown and September 11, to name two big ones. Near-death financial collapses are happening more frequently and they are getting more and more complicated to resolve.

It’s all up to Angela Merkel of Germany. I think back to how we used to refer to Maggie Thatcher as the “Iron Lady.” Oh my goodness, if Mrs. Thatcher was made of iron, then Frau Merkel must be a combination of titanium, inconel 625 that achieves strengths of 220,000 psi, diamond, and Teflon all rolled into one!

Merkel has dug in her heels. She will not settle for an agreement where German taxpayers will be liable for Greek, Italian, Spanish, or Portuguese debt. She has continued to stick an ihre waffen (stick to her guns) regarding her sound money philosophy.

Wouldn’t it be great if we had someone like Angela Merkel running our country? Then we wouldn’t be circling the financial bowl.

We aren’t that different nor far away from what’s happening in Europe. Our manic spending and untenable build-up of debt makes us next in line for the bond vigilantes. That won’t be pretty...

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Related Reading:

Debt Losing Its Luster
Eurozone “Death Spiral” Is Spreading
New Bond-Buying Binge Ahead?

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