The Twin Financial Hurricanes.

Two storms are battering the financial world: 1. the European banking crisis and 2. the FED's intentions. To be sure, both are linked to the failure of Soft Socialism, or Social Democracy as it is called in Europe. It is the idea that the government knows best and can allocate funds from taxing away over one half of citizens' income and run education, health care, transportation and welfare. When productivity falls, the shortfall is made up of deficit financing. The problem is that Socialism kills individual incentive, so deficits have become a way of life. Add to this the chorus of Krugmans that deficits do not matter and Central Banks should print huge amounts of money and the current plight is certain.

Here is the latest on the twin financial crises:

1. The European banking crisis.

The EU finance ministers met in Luxemburg and produced a great failure. Then they met in Brussels which meeting has just finished this week. It took 7 hours to negotiate how to handle failing banks. These are the decisions:

1. they discussed the use of the European Stability Mechanism.
2. shareholders and creditors are liable first if a bank fails
3. want to allow governments to nationalize failed banks
4. want to stop the contagion from banks to nations.

"Bail in" is the way to go. In other words, the Cyprus model that strips large deposits. This will not calm the nerves of bank depositors. Will it start a bank run? Almost certainly.  So far, market reaction has been positive. However, the big question is 'what will the Germans do?' Merkel must look tough for the September election and without German help these agreements do not mean much. Another question is the consent of the EU Parliament. The system is so complicated that it is unwieldy.

The FED's intentions.

FED Chairmen used to be terse, close mouthed and prone to obfuscate. Bernanke tried to change this. In his latest news conference he raised the possibility that the FED would "taper" (meaning slowly phase out) the bond buying (QE), but maintain low interest rates. The Market does not buy it, after all, there is a connection between the bond buying and interest rates. Treasury rates increased and bond prices fell steeply.

Where will people put the money that comes out of Treasuries? What will China do?