Here's a follow up to a story posted here recently regarding Iceland's collapsing currency. The Icelandic Krona is down sharply this year. What makes this particularly interesting is that it's an example of how rumors drive global currency trends seemingly more than interest rate differentials and growth rates.
In other words, individual's net worths, house prices, jobs and the value of the currency in their pockets is becoming more volatile based on the behavior and rumor mill of a few hedge fund managers and bankers who operate as non-sovereign pirates on the high seas of finance. There size is now big enough to make it as easy to play around with the multi-hundred trillion dollar currency markets as it is to play around with the multi-hundred billion dollar stock and bond markets. And since the currency prices (and price signals) that are affected with these fund's raids are indistinguishable from the prices (and price signals) generated by more legitimate economic activity; used in part as the basis to determine political policies - it can be said that the funds have engineered a back door gateway into establishing a de facto world casino banking operation that can influence laws as well as currency prices to their benefit.
The tail is wagging the dog. Here's an example of this perverse financial blow back reported today by Bloomberg:
Swaps Tied to Losses Became `Frankenstein's Monster' (Update1)
By Neil Unmack and Sarah Mulholland
April 15 (Bloomberg) -- The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica.
Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality.
Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call "Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around.
With the financial manipulation comes the political manipulation as fund managers are increasingly using the proceeds of the rigged markets to buy their way into a country's political system to get laws changed or to create new laws to make it even easier for them to ply their financial extremism.
Hank Paulson goes from CEO of Goldman Sachs to Treasury Secretary to give just one example.
We've gone way beyond the Enron traders bragging about how they manipulated the energy markets and made little old ladies squirm.
Getting back to the Iceland story; according to another recent Bloomberg report; Richard Portes, president of the independent Centre for Economic Policy Research, said a hedge fund tried to get him to bad mouth Iceland's economy. To his credit, he reported this event to regulators. Apparently one of the founding partners and senior executives of unnamed fund was trying to spread a meme that that Iceland's banks were in trouble for the purpose of capitalizing on the subsequent collapse in stock price (via short-sales and other 'negative bets' such as put options) that would skyrocket in price in the new global world casino bank.
As rumors are spread about Iceland, the fund sells short the Icelandic banks stock; driving the price down -- which has the effect of virtually validating the rumor -- with computers kicking in sell orders without any human intervention. More traders, hedge funds, and computers jump on the band wagon selling more stock short -- weakening the balance sheet of the bank - who is turn sends out distress signals to creditors -- and these signals get picked up by the funds (and computers) -- who in turn sell more stock short. The vicious circle repeats again.
The hedge funds' multi-trillion dollar 'stick' they use combined with 'distort and short' rumors and bets in an environment of virtually no regulation or oversight means hedge fund managers can gamble with little or no risk due to the self-fulfilling prophesy aspect of these trades and rewrite laws as they see fit (and can afford).
The funds have the power to sink a country, not just a company. Should this be considered a hostile attack on a nation's sovereignty? In an age where all currencies are fiat currencies; a nation's economic vitality depends its inter-banking relationships that form the basis of that country's capital structure. If a fund attacks that foundation for the sole purpose of destabilizing that economy without any regard as to whether country is bankrupted than it stands to reason that yes, such an attack might be considered a proxy declaration of war with that nation.
What is Iceland's recourse to counteract the hedge fund pirates? To raise the cost of piracy, the country has been raising interest rates, but that looks like it will put the country's economy into a nasty contraction.
According to Bloomberg:
On April 10, the central bank forecast Iceland's economy will contract 2.5 percent next year and shrink 1.5 percent in 2010. The recession will be accompanied by 5.9 percent inflation in 2009 and 2.8 percent in 2010, the central bank estimates.
``The central bank is basically saying that we have to generate a depression to bring inflation back into check,'' Landsbanki Islands's Eliasson said.
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