- Too Big To Fail 2: Socialism's Revenge

Personally I thought TARP was a bad idea. Neo-Keynesians like those in the press love to say that the credit crunch was evidence of broken markets but it wasn’t. At least, it wasn’t until TARP broke them. By preventing failure TARP took the one absolutely essential component out of capitalism's economic equation and left the markets shattered. You can’t have ‘creative destruction’ without the destruction.

It’s no secret what the motivation for that was. Hank Paulson wanted to save the network of banks that served as the ‘private’ component of the Fed’s monetary policy infrastructure. It was his belief that if these banks were allowed to fail, the confusion and delay that would have resulted from their reorganization would have shattered the US economy and caused an unprecedented level of economic devastation.

Personally I think there were lots of ways to prevent those consequences without destroying America’s financial markets. But at this point those speculations are water under the bridge. The markets are now broken, and it’s no easier to get the fertilizer back into the horse now than it would have been in autumn of 2008. Banking was already the most regulated industry in the country, and with all those government regulators making decisions about how the banks were run, they weren’t really all that ‘private’ in the first place. Since TARP, it’s even tougher to figure out where the private portion of the banks end, and the government begins.

But there is a new fire in the sky, and this time it’s over Europe.

Europe’s banks are more heavily leveraged than those in America, and because of the unique structure of the EU’s monetary integration, there is no facility for them to put together a TARP for them. So when the asteroid of a Greek default hits the earth (and it’s certain that it’s going to) we are very likely to see what might have happened in America without a TARP.

It won’t be a pure test. The idea of individual economic liberty is regarded with deep suspicion in Europe. They like to give 'Democracy' lip service, but millenia of transmogrifying their tribal culture into modern political systems has left them much more socially stratified than we are here in the states. In Europe they have an elite and the plebs, and the two aren't often mixed. And their governments are much less apologetic about the way they prevent that mixing than ours is.

So Europe’s banks have always been much more integrated with government than those in America. This means that instead of a single bloated TARP program there may be a French TARP for French banks, a German TARP for German banks etc. That’s the way they’re betting at Jeffries, and I tend to agree with them. And if the banks are nationalized in that way, then the future outlook for the Euro is all but nil.

But it's not like the result will be trade-able. Sure the Euro will be falling to some fixed conversion rate with ... well with whoever. But if the Germans leave first or the Greeks will make all the difference. If the Greeks leave first, then the Euro will likely strengthen, but if they leave last it will weaken. It's like knowing that the car will stop running, but you don't know if the wheels will lock up or if it will explode into a ball of flame. So it's tough to know whether to run toward it or away.

Personally I can't wait for a Greek default. However it turns out, It will be a relief to know that reality can't be ignored forever simply because politicians want it to be.