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Sunday, May 29, 2011

Mailbag: "Bear Trader" writes re Strauss-Kahn Case:

You think unlikely that Strauss-Kahn, 62 year old ex-head of the IMF, would be chasing a black house maid down his hotel hallway. Me, I'm agnostic. Some people are goat-weed horny and some people get a hard on from power over others, especially killing.

Let us presuppose that Strauss-Kahn was set up, "framed". One then has to look at motive and opportunity. Jean-Claude Trichet, head of the European Central Bank (involved with the Credit Lyonnaise scandal in 2003 when Treasurer of France, found not guilty, but was indeed guilty as far as I can judge) has been leading the "No haircut for Greek Bond holders" charge for the European Banking people while Strauss-Kahn has been pushing Greek bond restructuring, that is, "hair cutting" Greek bond holders. It looks clear to me that Strauss-Kahn has been running a power game with the European Central Bank. Been obvious for years. In a sense it is the old power struggle at the rotten heart of the EU, the struggle for dominance between France and Germany.

The world, looking through the European Central Bank's eyes, requires a harmony in Europe sufficient to avoid a repeat of the 20th Century cataclysms. The Strauss-Kahn faction agrees, but in a very French way - they believe that European peace is best served by French control and that Germany should know it's place - to serve, and not to rule. After all, Germans are stupid and (upper class) Frenchmen are brilliant, humane, witty, and sexy. The Germans, on the other hand, refuse to be France's beasts of burden.

To the Trichet (German - Luxembourger - Czech - Polish - Swiss) banker faction it looks like the French are suffering from the inability to add and subtract or even distinguish between delusion and reality. The European banks function under a reserve system set at the Basel III (I wrote "Basel II" in my previous email when I should have written "Basel III") which "recommend" at least 7% bank capital reserves. The "quality" requirement for these required reserves looks very questionable to me. The European banks are very shaky indeed

As the banker's faction sees things, Dominique Strauss-Kahn, with his money printing "answer" to the PIIGS problem would be the end of the Euro common currency and almost certainly mean the end of the EU. Strauss-Kahn has been playing chicken with the Germans with the goal of personal power (as the banker faction sees it).

As Strauss-Kahn sees it, the problem is that the bankers refuse political control and can easily be bailed out with enough "Quantitative Easing". Strauss-Kahn is a very, very arrogant man.

I think the banker faction has a less delusional situational analysis. Since Strauss-Kahn has been arrested the European Central Bank has embarked on a program of increasing interest rates throughout the banking system intended to control inflation and recapitalize the banks. This shows considerable wisdom especially when compared to the Bernanke Fed and one and a half trillion dollars per year US Federal deficits. The odds of the EU surviving go up while the odds of the USA surviving go down.

So there you go, motive. On the other hand, least hypothesis is that Strauss-Kahn is guilty.

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