Fed Governor Tarullo Warns of the European Contagion

 Let's hope the mudslinging doesn't get any worse...
sorry, Europe, but he's kinda right...

Needing validation for the swap line that the Fed opened up to "help out with some dollars" after the European mierda hit the fan, Fed Governor Daniel Tarullo came out warning that we're next.

Perhaps Spain is about to go down. Perhaps not thanks to that massive European slush fund that's not actually a slush fund yet because the eurozone can't agree on whether they should pay now or just promise to pay. Hey wait, I thought you guys would have discussed that sort of detail before pulling the trigger on a $1 trillion blank check? In honor of the Spanish, here's a (barely relevant) story of early high school Spanish class.

We were learning feelings like "fear" and "hunger" as in "I'm hungry". It's difficult in Spanish because you own the feelings, unlike English speakers, who express it as a state. Perhaps it is a reflection of English-speaking people that we don't actually own hunger or fear, we just possess them like we bought that shit. Or put it on credit.

Anyway, my teacher asked someone in class to say "I'm afraid."

Tengo mierda he said.

I would guess that Europe can relate to that feeling. And I'm laughing directly at them like I did that guy.

I digress. Here's Tarullo validating the Fed's commitment to providing a nice supply of dollars for whatever the EU is up to (even if he, his Fed and the Europeans don't fully understand what it is) and threatening everyone by saying underpriced, cheap debt is the cause of the euro's fall. That's fucking hilarious because the Fed is a trend-setter in the area of underpricing cheap debt (see: ZIRP + for an extended period) and by sending a metric shit ton of dollars to Europe, is totally confirming their commitment to that:

Although the sovereign debt crisis in Europe may have appeared to erupt virtually overnight, its origins were long in the making. For years many market participants had assumed that an implicit guarantee protected the debt of euro-area members. For a number of euro-area countries, including those most under pressure now, this presumption may have led to a systematic underpricing of risk, which made debt cheaper to issue than it probably should have been. 

 Blah blah, we're next.

Then, he jerks off the great monetary authorities of the world who, with their wild money creation, have staved off total financial disaster. Again. Somehow.

One set of initiatives addresses sovereign risk. The European leaders announced the establishment of a European Financial Stabilization mechanism that would be based on up to €60 billion in European Commission funding and a special purpose vehicle that could raise up to €440 billion in additional funds in capital markets with guarantees provided by member state governments. Moreover, the IMF stated that it stood ready to cooperate with the EU, in accordance with established IMF lending programs and procedures, if requested by euro-area members. According to the EU, total available support through loans and credit lines, including potential bilateral IMF loans to member countries, could be as large as €750 billion (approximately $900 billion). In addition, the EU and the IMF announced final approval and funding for the earlier announced Greek rescue package in an effort to assuage concerns about the country's financing needs.

Another set of initiatives addresses market liquidity. Specifically, the European Central Bank (ECB) announced that it was prepared to purchase government and private debt securities to ensure the depth and liquidity of euro area debt markets that were considered dysfunctional. In addition, the ECB expanded its liquidity provision facilities, including offering full-allotment operations for three- and six-month loans. Finally, as I will discuss in more detail later, to forestall an emerging shortage of dollar liquidity, the Federal Reserve reopened temporary U.S. dollar liquidity swap lines with the ECB and other major central banks.

The effect of the announcement on bond markets was immediate. Bond spreads for the peripheral European countries narrowed substantially, at least partly reflecting purchases of government securities by euro-area central banks. The ECB's enhanced liquidity provisions, including dollar credit from the liquidity swaps, have contained stresses in the European interbank market and provided an important backstop for these markets. Stock markets also initially rebounded strongly following the announcement of the European package; however, their declines over the past week serve as a reminder that investors are aware that this package cannot ultimately relieve the need for real, and likely painful, fiscal reforms in some euro-area countries.

I read that last sentence to say: You will probably want to bend over now because even though Europe just got aSSrap€d by these guys, it won't be enough and they'll probably be coming back for more. Even if it hurts.

It does not look good for us. That's Paul Volcker, Daniel Tarullo... who else is whining about Europe being bad bad bad for us?

Read the rest via the Board. Blah blah blah.

The ECB's Trichet counters with the argument for a united solution in Europe and a blank check from the central bank, which is exactly what the Fed offered. Drawn on which bank? Ours? How does that make sense?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.