Geopolitical effects from the financial meltdown

the US dollar though is rallying though for a rather different reason than in the past. For one, a bunch of European banks are short dollars and need to buy dollars spot in the fx market to cover their maturing dollar debts (see Slater and Ng in today's journal). For another, the dollar is rallying for the same reason as the yen -- namely it was a funding currency for carry trades. THat is something new

“In a situation like this it’s turning out that it’s every man for himself, every country for itself, everybody’s taking care of their best interest and that’s what we are doing."

For someone who is better educated in IR or Economics than myself, I would be interested to know hear exactly how this round of prisoner's dilemma pans out. War? Plague? Pestilence? NWO global financial superstructure?

Coordination to address a crisis like this one would have required preparation beforehand. Preparation beforehand would have required public admission that such a crisis was possible. Public admission that such a crisis was possible would have led to public pressure to take steps that might forestall it, steps that would a) not have been easy to identify and agree upon and b) would have been politically unpopular. The second condition makes the first one largely moot in the United States, and probably not only there; here, at any rate, an administration in its last year and a Congress wholly preoccupied with the upcoming elections preferred not to be seen even considering action that might risk negative public reaction of any kind.

Events left them little choice, as things turned out, but only with respect to bailing out American financial institutions in an effort to stabilize American credit markets. Coordination between governments to address larger questions represents an additional layer of complexity -- and in perfect fairness to the administration, even European governments dealing only with one another after a decade of experience with the EU structure haven't successfully managed it.

The Russian loan to Iceland seems an extraordinary one unless one considers it in the context of Vladmir Putin's KGB background and obsesion with Cold War era strategic issues, then it all makes sense.

Iceland was one of the key nodes of NATO's trans-Atlantic defenses during the Cold War. One suspects that Iceland's unnmed unhelpful 'friends' included the US, the UK, and posibly Germany and France. So it's old 'enemy' Russia finally took an opportunity which iut would have sacrificed much for during the Cold War era to gain influence with a key NATO member.

Of course the value of this move is very questionable and lies in the long term. If Russia can rebuild it's armed forces, particularly it's navy, and if the US remains a key part of NATO and the EU countries cannot defend themselves - then someday Russia may be able to gain a base in Iceland able to interdict US interventions in a European war, or at least 'neutralize' that base so that NATO cannot use it.

In no other way can this rationally be explained given the strains the Russian economy is now under, I think.

Well, this kind of refutes the post from a few days ago about how European countries were going to co-operate without the U.S., which would be a sign of our diminished influence. They aren't co-operating, and our currency and our bonds remain the world's safe haven.

The Iceland thing is frankly embarrassing for every NATO country, or at least it ought to be. What an indictment of how we have managed our affairs.

You'd think our policy makers might have noticed with the flurry of stories last week about Icelandic supermarkets not having the foreign currency to import basic commodities that can't be produced in Iceland's damp, cloudy, perpetual-British-winter climate, in other words, pretty much anything that isn't fish or mutton. Or that the more perceptive among them might have realized that the absolutely stunning run on Iceland's currency over the past year would eventually lead to such a situation.

But Zimbabwe it isn't, DB. Iceland can survive on mutton and fish for a while if need be.

The other problem is that Iceland seem to have made itself into a huge banking centre, possibly offshore banking in it's less salubrious tax-evading side. Given it's status as a banking newcomer it's possible that the portfolio of loans are rather more filled with subprime assets than normal. I don't know that for sure. I suspect that few in the US or the EU are familiar with Icelandic banking law and regulation - thus it is difficult to assess the risks of a bailout loan rapidly. Or they may have figured that if they fix the liquidity crisis in the US and Europe, Iceland's crisis will also be fixed. So it probably went on to the slow track.

Another problem is that it's HARD to justify a unconditional bailout of Iceland banks when the US can't unconditionlly bail out it's own. Another complication might be that an Iceland bailout would lead to a queue forming at the fed's cash window - with all the other NATO allies looking for free money.

Iceland seems to have made itself into one really, really BIG bank - so the choice may be to bail out Iceland or one or more of your own....