What goes around…

As the media are predicting the end of the credit crunch, governments and central bankers are becoming increasingly worried. Especially the US, hardest hit by the mortgage crisis and weary of the efforts to keep the backbone in their banks must see the circular motion of a tornado approaching their financial shore. Oil has hit $139 a barrel and is rising without an end in sight. The dollar on the other hand is still slipping down the slopes of inflation making it even more expensive for the oil addicted Americans to pay for their habit. So what is keeping the bureaucrats in Washington and the bosses on Wall street awake at night? This:

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In March 2008 the combined banks borrowed a total of 45 billion dollars from the Federal Reserve Bank. This was more than all the money that all the banks in the US had borrowed from the Fed in the previous century. Part of this sum went to keep up Bear Stearns that suffered from a "sudden" financial heart attack and bearely (pun intended) survived. $29 billion went to the ailing bank, an amount that was “on the very edge of its legal authority” according to former Federal Reserve chairman Paul Volcker. So what happened with the other $16 billion? And what’s worse; what happened to the $150 billion that was pumped in afterwards?

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Now let’s assume that the Fed had all this cash in store. What would a sudden influx of money do to the value of the good old greenback? Like any good, whenever the total amount goes up, the value goes down.

The total cost of the credit crisis is around $ 1 trillion, according to the IMF. Who’s going to pay for all that? American tax payers? Seeing the allergy most Americans have for paying tax (and who hasn’t..) and seeing it’s almost election year, I can’t see anyone committing political suicide by proposing sharp and painful tax increases.

According to Wim Bischoff, Chairman of Citigroup, the amount of money available from Sovereign Wealth Funds will be $12 trillion by 2015. Already the funds hold over $2,75 trillion, which is more than all the hedge funds and private equity in the world together. Just realize that SWF’s don’t have to comply with even the minimal standards that hedge funds are held to. Also realize that the entities behind these funds are some of the most undemocratic regimes in the world. Even if they don’t have a seat on the board of the banks and institutions they own what will happen to sustainable business? Can a bank afford not to give a loan to a weapons’ manufacturer that happens to sell to Abu Dhabi, when this same country is controlling the fund that owns most of the bank? The same dollars that were paid to regimes in Saudi Arabia and Kuwait, countries with atrocious records when it comes to the rights of women and countries that throw dissidents in jail without trial are now used to buy large shares in American and European financial institutions. And what will happen with the oil dollars of Iran? The current sanctions against this country prohibit it from outright investing it's US currency. But money is like water and will find a way. Bankers, keep your eyes open and your compliance officers sharp.