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The War on Capitalism


European leaders take aim at free markets.

The capital market machination cracked last week and stopped functioning in an orderly manner. A few short sessions -- and a trillion dollars -- later, many in the mainstream media declared that all is well in the world.

While calmer heads are quick to put the panic into perspective -- the S&P is a mere 5% from fresh 18-month highs -- the system broke, if only for a short period of time. That, by definition, is a crash.

As I wrote last week, there are a few ways to view what happened, ranging from the obvious to the conspiratorial to the nonsensical. At the end of the day -- and from this day forward -- the takeaway has little to do with the "why" and everything to do with the "what." (See: The 1000-Point Plunge: Reasons and Results from the historic collapse.)

Politicians were quick to declare war on the perceived culprits; German Chancellor Angela Merkel lashed out, saying "speculators are our adversaries" and she's "resolved to win the battle against markets." Senator Chris Dodd, Chairman of the Senate Banking Committee, said on Sunday that high-frequency trading created a "casino environment" where "finance is getting detached from the real economy."

To be sure, there is plenty of blame to go around. As we've long posited in Minyanville, the spectrum of culpability stretches from over-extended consumers to institutions that financially engineered the markets to policymakers complicit by acceptance. While the system collapsed during the first phase of the financial crisis and snapped anew last week, those events were not the cause of concern -- they were simply the effect.

Long-time readers of Minyanville understand the causal elements of cumulative imbalances and the societal ramifications of percolating class wars, as well as the potential pitfalls inherent in a finance-based, derivative-laced global economy. Those are among the reasons why we warned of "a prolonged period of socioeconomic malaise entirely more depressing than a recession" in the summer of 2006. (See: Keynote Address from Vail.)

Emergency Measures: Deja Vu!

We've long drawn the distinction between drugs that mask the symptoms and medicine that cures the disease, as well as the difference between a legitimate economic recovery and debt-induced largess.

Over the weekend, taking a page from the stateside playbook, the European Union crafted a $962 billion emergency loan package with hopes of containing the contagion. (See: A Five-Step Guide to Contagion.)

While these numbers are obscene -- by some accounts, ten-fold the size of what was expected -- the reality is that this has been the grand plan for nearly a decade, an attempt to buy time and push obligations out on the time continuum. The more things change the more they stay the same; the more they stay the same, the greater the forward risk. (See: Anatomy of a Recession.)

Entering September 2008, with $871 billion in corporate debt coming due in the financial complex, we warned that one of two things would happen. Either markets would experience a cancer that spread through industry sectors or the system, as a whole, would experience a cataclysmic car crash. (See: Pirate's Booty.)

The US government took a wait-and-see approach before attempting to "buy the cancer" and "sell the car crash." When they finally bit the bullet, passing TARP on October 3rd, 2008, the S&P fell 500 points -- over 4000 Dow points -- before finding its footing five months later. (See Shock & Awe.)

Last Wednesday, when the specter of "proactive" measures by the ECB kept a tentative bid under a very nervous market, we openly asked if the European Union would take the necessary steps to snuff out the fuse of contagion. (See: Will Europe Order a Code Red?)
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