Tue Jan 13th, 2009 at 06:04:28 AM EST
The Mother Of All Bailouts seems to become a bigger mother every day. Will it also undermine itself by causing countries to set up barriers to international finance?
promoted by Jérôme - interesting discussion below the fold.
I was catching up on David Goldman's blog at Asia Times and noticed his comments about Italy trading flat with Bank of America. It would seem odd that a bank (even a large bank) would trade flat with a reasonably productive state, but there is a double whammy working for B of A (and everyone like B of A) and against Italy (and everyone like Italy).
First, the bottomless bailout has effectively made several, privileged entities in the US financial sector (including B of A) sovereigns by pulling them into the protective ring of the Treasury. Consequently, Italy isn't really trading against B of A, it's trading against the US Treasury.
Second, the US Treasury keeps borrowing by the boatload, and the US Dollar remains the world's reserve currency. That means that every borrowing sovereign finds itself in line behind the US at the door of every lender out there, and the US isn't leaving much for everyone else.
Which leads us to this: How long before sovereigns, or coalitions of sovereigns, start putting ring fences around their financial systems to restrict the flight of capital to the US? And when (not if) that happens, how will bailouts and stimulus packages be funded, and where will the credit loosening the MOAB was supposed to generate come from?