How to Find New Capital and Influence Financial Markets

Major stock indexes are drifting today, seemingly awaiting some sort of news from Europe.

It’s as if traders are now hanging on every word emanating from some commissioner, director, functionary or spokesmodel on the continent before they make their next move.

Up one day, down the next, the mood swings like a love-struck girl pulling petals off flowers…

In the final 45 minutes of trading yesterday, the S&P 500 transformed a 1.8% drop into a 2.3% gain — averting the formal onset of a bear market as measured from the April 29 high.

The catalyst? The Financial Times said European officials are figuring out how to pump new capital into the banks.

“Although the details of the plan are still under discussion,” the salmon-colored rag reported, “officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis.”

Love the choice of words here: It’s not about fixing the problem, but convincing traders the problem is fixed.

Where, you might ask, is this new capital for the European banks supposed to come from? Guess that’s one of those pesky details “still under discussion.”

But we’re getting a clue: The International Monetary Fund’s European chief proposes today to buy European government bonds, alongside the eurozone’s own bailout fund.

There were rumblings about this last week. There was even a number put out there by Dow Jones News Service, a doubling of the IMF’s bailout fund to $1.3 trillion.

Hmmm… Where would the IMF come up with $650 billion on short notice? Why, from its member nations, of course.

The United States ponies up 17% of IMF funding. Thus, the latest European rescue, should it come about, will cost US taxpayers $110.5 billion. That’s $356 for every man, woman and child in the country.

Dave Gonigam
for The Daily Reckoning

The Daily Reckoning