The leaders of the EU are discovering the first unintended consequence from their move to force sovereign debt bond holders to accept a 50% repayment on their loans to Greece (taxpayers pay for the rest).  No one wants to buy new sovereign bonds because they cannot insure payment of principal or interest.

Bond holders were forced to roll bonds over that were short-term to a 50 year maturity bond and accept an interest rate of 5%, which is well below the current rate of over 30% on the 10 year bond, and the 150% on the short-term bonds.

The “theory” is that if the bond holders agree (gun to the head) it will not trigger a CDS (Credit Default Swap) payout, which could be way worse than lost principle on bonds due to the CDS market being $30 trillion. Its only theory since the CDS tool is a fairly new derivative product that came into being in 2004, and no one really knows how a CDS meltdown would play out, which is most likely to be extremely nasty.. See report here http://www.itmtrading.com/blog/index.php/2011/11/too-big-to-failtoo-big-to-bail/

Should the above deal come to fruition, we will see if they can engineer a “soft default” that does not trigger a CDS payout. If not then we may witness a meltdown worse than 2008?

Of course in the outcome of the EU summit last week Angela Merkel said that moving forward into the future, banks would not be asked to take a haircut on government bonds again, so it will be taxpayers to foot all bad debts. But really it seems that there has been a continuous stream of “Unintended Consequences” from many of the actions taken by central bankers or governments that are supposedly the most brilliant minds on the planet.

Look at what happened in 1999 when the Glass Steagall Act was repealed. This was enacted in the 1930’s as a result of the stock market crash and was created to separate the commercial banks that took deposits, and the investment banks that sold securities in order to prevent another depression. Once that ban was lifted the line between the two banking sectors blurred and then was obliterated in 2008.

The Commodity Futures Modernization Act of 2000 exempted derivatives from regulation, supervision, trading on established exchanges and capital reserve requirements for major participants (AIG, JP Morgan Chase et al).

In 2004 the SEC relaxed rules that enabled investment banks to substantially increase the level of debt they were taking on.  This fueled the growth of derivatives in the form of mortgage-backed securities supporting sub prime mortgages and created a new derivative product in the form of the CDS. Widespread mortgage defaults increased the exposure to CDS losses and many insurance companies and banks had to take bailouts in order to survive and payout those CDS’s.

As the US banking system was imploding, Hank Paulson and Ben Bernanke tried to prop it up by a massive injection of capital into the banking system. While we still have a banking system, it is not the system it was before the above changes were implemented.

Here are some additional “Unintended Consequences”

1. Moral Hazard; What the banks, insurance companies etc. now know, is that if you’re tentacles are broad enough, the central bank will not let you fail. While they were too big to fail in 2008 all of the subsequent mergers and buyouts have only amplified that fact and those banks have gotten even bigger.

2. Unemployment remains stubbornly high and monetary velocity remains stubbornly low; when they injected those trillions into the global banking system, their intent was for the banks to lend out those funds, stimulate the economy and create inflation to paper over the problem.

3. Occupy Wall Street on a global basis; the division between the 1% and the 99% has become much more obvious and the 99% are angry. More people are paying attention to the benefits given to the wealthy in power. This movement appears to be growing regardless the tactics used to dismantle it.

4. Squatters economy; With the robo signing snafu and the length of time it now takes to complete a foreclosure, there are many that are living in these homes rent free for years. In addition, vacant homes have skyrocketed. There are many consequences to this issue, but the lost revenues for cities and municipalities have brought other shortfall issues to light.

There are many more unintended consequences, but the one I see unfolding that scares me the most is the loss of our freedoms and rights. The Federal Reserve continues to use new tools (liquidity swaps) that they create to go around any form of oversight and create inflation that transfers your wealth their way. In Europe, when elected officials did not do what the EU powers wanted them to do, they were summarily removed and unelected banking officials were put in their place.

If these are the brightest minds and they cannot see the possible consequences of their actions, we are all in big trouble. If they do see the consequences and move forward anyway, that would be even worse. Either way, it is clear that we need to protect ourselves. Private physical gold and silver in your possession, some cash and a food garden are your best protections from their unintended consequences that we are all forced to live with.