The Federal Reserve is the world’s new Titanic … and Bernanke is the egomaniacal captain at the helm. His character reminds me of Bogart playing the paranoid, obsessive Captain Queeg in “The Caine Mutiny.” Remember that threatened Navy captain who navigates into a fog, panics, nearly rams a battleship? That’s “Capt Ben” in Titanic-2. And given his handling of our banking system and the global economy, he’ll sink the Titanic-2. Capt Ben’s a tragic figure.

Worse, Obama’s giving ol’ Capt Ben a second chance to pilot into new icebergs dead ahead. The Economist calls them “Asset Bubbles.” Problem? Capt Ben can’t see through his ideological Greenspan/Reaganomics goggles, clouded by his obsessive allegiance to Wall Street’s “Fat Cat Bankers.” Nothing new: He failed to see warnings of “icebergs” back in 2007. Yes, and he’ll miss any new icebergs, sink the global economy, and plunge the world into the eerie depths of the “Great Depression 2.”

When the Senate reconfirmed Capt Ben, it became Obama’s “biggest domestic policy blunder.” And he made matters worse when he failed to push the “Volcker Rule,” a defacto revival of Glass-Steagall separating commercial banking from the “Fat Cats” high-risk gambling with derivatives trading and investment banking.

Greed & “fat-cat” bonuses

Wall Street lawyers, lobbyists and traders love their mega-bonuses. So they’d get around any new “rules” fast. “Fat Cats” really don’t need any new Supreme Court cases (like that one allowing disasterous unrestricted political donations) to “buy” votes in the Senate. Glass-Steagall or not, the “Fat Cats” will just double up on their tools for lying, cheating, stealing and manipulating Main Street’s 95 million investors. So assuming we’re stuck with this weird new version of “Captain Queeg.” And it’s only a matter of time before Capt Ben runs “Titanic-2” into a battleship, a new iceberg, or another unseen black swan.

Hollywood remake of Titanic? Yes, a great idea. Got it from Jeremy Grantham, founder of the $100 billion GMO money managers. He’s got a track record: In 2007 he saw the icebergs in “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … The bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.” He sees again.

Unpredictable? No, Capt Ben’s “Titanic” is a very predictable “black swan”
This Titanic sequel was exactly what Grantham had in mind a couple months ago in his letter to investors: “Lessons Not Learned: On Redesigning Our Current Financial System.” Listen to his thriller plot: “Imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship’s construction, of the company’s policy, or of the captain’s competence. ‘No one could have seen this coming,’ would have been their constant refrain’.” (More)

You think the Dodd/Obama financial reform bill has a chance of passing without huge loopholes that will the GOP will insert to gut its effectiveness? Dream on, and read Gretchen Morgenson’s NY Times columns It’s Time for Swaps to Lose Their Swagger.  She pinpoints the core of the war going on between Wall Street’s high-frequency traders, like Goldman’s team that very often generates $100 million trading profit days, versus Main Street America’s 95 million long-term investors who just want to build a retirement portfolio, not in a day but over 30-40 years. Remember, Wall Street’s spending $400 million on lobbyists to kill reform, they will win … setting up another bigger meltdown. First, listen to Morgenson’s analysis:

High-octane trading may be counterproductive to taxpayers, for sure. But not to the speculators who win big when such transactions pay off. And in the case of A.I.G., the speculators got their winnings from the taxpayers … Derivatives are responsible for much of the interconnectedness between banks and other institutions that made the financial collapse accelerate in the way that it did, costing taxpayers hundreds of billions in bailouts. Yet credit default swaps have been largely untouched by financial reform efforts.

This is not surprising. Given how much money is generated by the big institutions trading these instruments, these entities are showering money on Washington to protect their profits. The Office of the Comptroller of the Currency reported that revenue generated by United States banks in their credit derivatives trading totaled $1.2 billion in the third quarter of 2009. Congressionl “reform” plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us.

Get it? Wall Street’s lobbyists are winning, reform is virtually dead, another derivatives crash is guaranteed! Then, echoing Warren Buffett’s concern that derivatives are “weapons of financial mass destruction, Morgenson adds: (More)

The Journal calls it “Europe’s Original Sin,” a Faustian tale about the EU selling its soul to the Devil, a coverup about how Europe’s “National Leaders Ignored Greece’s Soaring Debt for Years.” But wait, no, Europe did not get the idea of massive deficit-financing from America, looks like they thought it up all by themselves, with no prompting:

Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country’s finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules. Though the European Commission and the U.S. Federal Reserve are examining a controversial 2001 swap arranged with Goldman Sachs, Greece’s own budget moves, in clear breach of European Union rules, dwarfed the effect of such deals. … years of overspending, leaving bond investors worried the country can’t pay back its debts—weren’t supposed to happen in the euro zone. 

Well, it did happen, as if willed by Greek Gods on Mt. Olympus. So America and Goldman are off the hook: The “controversial derivative transactions Greece used to help mask the size of its debt and deficit numbers” were small compared to Greece’s failure, for example, “to book €1.6 billion ($2.2 billion) of military expenses in 2001—10 times what was saved with the swap.” 

Not so fast, says Niall Ferguson, a leading financial historian whose works include the recent “Ascent of Money: A Financial History of the World,” “The Cash Nexus: Money and Power in the Modern World,” “Colossus: The Rise and Fall of The American Empire.” Writing in the Financial Times, Ferguson warns that a “Greek crisis is coming to America,” like America started the trend of going deep into debt to finance domestic economic expansion, then the idea gets picked up all over European nations, and now it’s going to backfire on America: (More)

USAToday reports IMF’s managing director, Dominique Strauss-Kahn, warning  investors that global banks are still clueless.  They “remain saddled with too many toxic securities and have not yet shown an understanding of the need to embrace far-reaching operational reforms … Bad loans must be disposed of before banks can play their customary role in financing economic growth.” So what’s new? Sounds like they’re trapped, as always, in the same old mindset of blind greed and hyper-optimism. The IMF boss, a French economist, did made specific comments that suggest our “too-political-to-fail” banks are setting the world up for another, more lethal meltdown … and possibly the dreaded “Great Depression 2″ that we recently dodged:

“All around the world, you still have a lot of undisclosed losses” …

“You never recover until the cleansing of the banks’ balance sheet has been done, and now we’re not at the point where this has been totally done.”

“I’m rather pessimistic … politicians seem to have drawn the lesson that they need to change the way they’re working if they want to manage the global economy” but “the banking sector — very little lessons have been drawn in terms of behavior.”

Ouch! And that’s direct from the International Monetary Fund’s boss. You really have to wonder if we’re headed for another meltdown soon. And since the US doesn’t have another $23.7 trillion (nor the political will) to bailout Wall Street’s “too-greedy-to-fail” banks again, investors better wake up fast and prepare for that dreaded “Great Depression 2″ we barely dodged in last year’s financial “near-death” experience.

“Charlie and I believe Berkshire should be a fortress of financial strength” wrote Warren Buffett. That was five years before the subprime-credit meltdown. “We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. I

n our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” That warning was in Buffett’s 2002 letter to Berkshire shareholders. He saw the future meltdown years before Greenspan, Bernanke, Paulson and many other political ideologues. They were in denial, ignoring the “mega-catastrophe” triggered by derivatives, the world’s new “financial weapon of mass destruction:” The Iraq war build-up was at a fever-pitch back then. The imagery of WMDs and a mushroom cloud fresh in his mind. (More)