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Here's a scary chart, one that I believe explains why the current Debt Crisis merits capitalization, and why it won't go away easily - certainly not by merely "printing" money and giving it to the FIRE sector (finance, insurance, real estate). Click to enlarge:

USA: Financial Sector Debt Soared Sixteen-fold Between 1952 and 2008

In a most dramatic way, the chart shows that in the United States debt issued and owed by the financial sector (banks, insurers, brokers, etc.) soared to nearly one third of all debt outstanding. A similar pattern is observable across the entire Western economy.

The process gathered steam between 1995 and 2005 because of:

(a) financial speculation (leverage, derivatives, etc) and,
(b) securitization of all manner of bona fide and financially engineered loans, from mortgage debt and credit card receivables, to CDS hybrids (CMO's, CDO's, CPDO's, etc).

The end result was the financial/debt/monetary bubble that burst spectacularly in 2008 - and is still bursting, since the shadow-banking bubble machine has not been shut down. It is, therefore, highly ironic that the Debt Crisis caused by a virulent out-of-control financial sector has now infected the once safest haven of them all: government debt. Bankers, brokers, money managers and rating agencies - whose inter-connected behinds were collectively rescued from self-immolation three years ago - now lash out at the very governments whose deep pockets (a.k.a. taxpayers) saved their bacon.


Italian Government 10-Year Bond Yield, click to enlarge
Putting it another way, the massive expansion of finance and its subsequent collapse is suffocating the world's real economy. We need hundreds of billions of fresh capital to invest in productive projects like energy and network infrastructure, but the FIRE sector is demanding (blackmailing?) that governments continue to dump good money after bad down a bottomless pit, one dug by their own greed and perfidy.

Of course, governments are not innocent babes in this operatic auto-da-fe. First, they foolishly deregulated finance, a notoriously self-serving, risk-loving and cyclical business (for example, by abolishing the Glass-Steagall Act). And then, they kept looking the other way while finance mutated and morphed into a menacing giant, albeit one with extremely weak legs.

It is high time that governments act decisively and forcefully to reverse the "financialization" of the real global economy. We cannot survive, never mind thrive, on the "free-markets" mantras of Wall Street and City alone. The FIRE sector must be forced to de-leverage.

There are many ways to do this: higher capital requirements, strictures on own-account trading, transaction taxes, regulating off-balance sheet derivatives. In my opinion all of them, and more, must be implemented. The purpose is as simple as it is difficult: Kill the beast before it kills us.
Source: Financial Sector Debt Soars