What a difference two years makes. At this point in 2007, the concern was focused on mortgage lending in Florida, California and in a few high- priced real estate markets. As the effects of lending over- exposure rippled through the banks who repackaged mortgage loans into derivative securities, the chief concern was whether the breakdown was ‘contagious’ to the rest of the financial system or not.

The experts were saying ‘Not.‘

It is clear that what is happening is a number of different types of money panics taking place simultaneously. In America, mortgage lending was only a fraction of a much larger solvency crisis rooted in excess credit formation – expressed as a massive debt bubble.

In the Far East, the issue is a decade’s long runup in export goods which has led to massive inventory overload.

In the Middle East and other oil producing regions, falling demand leading to falling oil prices has reduced purchasing power.

In Russia, perhaps the Most Expensive War in the History of the World in neighboring Georgia/Ossetia has brought the Czar Putin’s economy to the brink of money collapse; the problem is old- fashioned capital flight. The same forces that destroyed the aggressively militaristic Soviet Union are undoing the aggresively militarist Putinistas. Nobody wants to do business with a bully. Russia’s energy exports are less valuable as well.

The Eurozone is caught in a vice; its economies are disparate; Portugal, Spain and Greece are basket cases, Italy is always in crisis, these look to Germany and France for bailouts. At the same time, Germany and France are understandably wary of being dragged into the abyss by the failures of their neighbors. The problems here are exacerbated by the Eurozone administrative stucture. The ECB is not a ‘Lender of last resort’, it has to resort to trickery.

Across the channel, England and Ireland are stuck in reverse, the outcome of carefully cultivated undiversified economies; relying on free spending Russian mafiosi and financial services in England as well as on real estate ‘boomer-y’ in both countries. Outside of football hooligans and Beatles’ reissues, these countries have nothing to sell to anyone else in the world, Even without the capital flight, the coffers are empty.

In Eastern Europe, much of which was spun off post the unravelling of the USSR, the newly liberated citzens raced with open arms for TV’s, cars, blue jeans, villas and other excrudescences of American Consumer Kultur which the West was all to happy to endow them with, at (un)reasonable rates of interest.

I’m sure it came as a shock that entry into the Disney- fied enterprise of American- style waste required repayment at interest; that sums were lent rather than granted as prizes for having escaped the bootheel of Socialism, but there is was … and is.

The West’s dilemma is this; if you lend me ten dollars and I can’t repay you, I have a problem. If you lend me ten billion dollars and I can’t repay, YOU have a problem. Here, the problems amount to trillions.

… more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year. Unless there is a material improvement in market conditions, re-financing at such a massive scale is simply not doable.

Where does all this leave us? More write- offs in the offing for several large banks such as Bank of America and UBS. This means more loans from the Black Hole; more stimulus packages and more and more printing of currency. As the hoped- for inflation fails to materialize the strain on both the Dollar and Euro will increase. The pressure on interest rates will increase. At the same time, countries turn to the IMF, which is reaching the bottom of its cupboard, as well. Nevertheless, the cash has to be had from somewhere. Ambrose Evans- Pritchard puts it gently:

Failure to save East Europe will lead to worldwide meltdown

What is happening is similar to watching a gang of thugs beat an old lady in the street with baseball bats. She’s a bleeding pulp, but the real wise- guys are loitering in the alley around the corner; Peak Oil and Climate Change. Once these two jump in … It will start getting really ugly. In the meantime, some of these East European countries will default, and like Ecuador, will blame it on the evil lenders.

What will happen next will be a revival of the contest for influence between Europe and Russia along with a rising sense of disappointment in American liberalism. There will be unrest with some governments falling. If the crisis produces hunger or no heat or electricity, there will be violence. Meanwhile, the liabilities from bank failures and defaults will add more stress to the global credit and currency exchange processes.

Keep in mind that all major currencies are virtually identical. A failure of one would call into question the survivability of the others. In the currency ambit of this crisis, there is no ‘Zero Sum’.

Here is Martin Hutchinson’s recent comments in Prudent Bear regarding Andrew Mellon who was Secretary of he Treasury during the Harding and Hoover administrations. His was a hard line:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.’’

He also derived what would today be considered progressive taxation policies; a reduction in income tax rates to reduce the taxation burdens to increase overall tax collections. Hutchinson makes this appreciation:

Had Mellon been Treasury secretary throughout the 2000s, as he was throughout the 1920s, he would not have needed to sort out this mess because we would not have been in it. Mellon had a keen appreciation of the dangers of bubbles, based on his decades of market experience as chairman of Mellon Bank and founder of Alcoa and Gulf Oil. Thus, he would have opposed the Bush stimulus proposals of 2001 and the Federal Reserve’s interest-rate cuts of that year, which between them prevented the full purging of the “rottenness” of the late 1990s tech bubble.

This is absolute garbage, of course. Mellon presided over the greatest (excuse me, second greatest) credit bubble in American history; from 1921 to `1929; he stood aside and did nothing nor did he hector his opposite number in the New York Federal Reserve Bank who maintained unsustainably low funds rates for the entire period. When the storm broke in 1929, he talked tough but let the progressive- wannabe Hoover walk all over him.

Just like Tim Geithner is letting Larry Summers and Co. walk all over him, now.