August, the cruel month

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PARIS, Aug. 6 (UPI) -- Just five years ago Monday, the financial crisis started when the American Home Mortgage Investment Corp. filed for bankruptcy. Recognizing the property bubble was about to burst, hedge funds began to sell. BNP-Paribas froze two if its funds, barring investors from taking money out.

On Aug. 10, 2007, the Federal Reserve and the European Central Bank and the Banks of England and Japan responded with a coordinated flooding of the system with some $300 billion to fend off the tightening credit crunch. For a while, it seemed to work.

The curse of August had struck again.

What is it about this wretched month when the masters of the universe are on their yachts and private beaches?

The great inflation began Aug. 15, 1971, when President Richard Nixon went to Camp David for a weekend with his top financial advisers. Faced with a balance of payments crisis, Nixon overruled the contrary advice of the then head of the Fed, Arthur Burns, and began to dismantle the Bretton Woods system, which had governed and stabilized the global economy since 1945.

Nixon announced the first wage and price freeze in peacetime, imposed a surcharge on all imports and closed the gold window, finally ending the dollar's last link to gold.

Inflation followed. The Organization of Petrol Exporting Countries met in Beirut to adopt Resolution XXV.140. Noting that Nixon has in effect devalued the dollar, OPEC resolved to "take necessary action ... to offset the adverse effects on the per barrel real income of Member countries."

For the first time, the Saudi Oil Minister Sheik Ahmed Zaki Yamani, in negotiations with BP and Exxon, first raised the prospect of an Arab oil embargo. The Yom Kippur War provided the opportunity, the oil price tripled and the inflationary tsunami flooded the rest of the decade.

August has other somber echoes. It was Aug. 3, 1914, that Germany launched the first world war by declaring war against France. Britain joined in Aug. 5. A quarter century later -- Aug. 31, 1939 -- Hitler ordered his Wehrmacht to invade Poland, launching World War II. War had become inevitable Aug. 23, when the totalitarian states of Soviet Russia and Nazi Germany signed the Ribbentrop-Molotov pact, agreeing with gruesome cynicism to carve up Poland between them.

Echoes of these events are tenacious. Last week, one of Italy's leading newspapers, Il Giornale, owned by the family of former Prime Minister Silvio Berlusconi, ran a massive front-page headline proclaiming "The Fourth Reich." It was accompanied by a photo of German Chancellor Angela Merkel making an arm gesture that could be interpreted as a fascist salute.

The story was the refusal of the ECB's governing council to announce any painless new rescue package for Spain and Italy, for example, by buying up Spanish and Italian bonds. The ECB said that it was prepared to help but only if the Spanish and Italian governments agreed formally to ask for support, which would require them to meet certain financial and policy conditions.

Il Giornale saw this as an example of German financial bullying, in which the newspaper was palpably mistaken. The head of the ECB, who announced that support would require conditions, is Mario Draghi, an Italian. The one dissenting vote to Draghi's plan came from Jens Weidman, the head of Germany's Bundesbank. Weidman used to be Merkel's personal economic adviser but since becoming the youngest head of the Bundesbank he has proved to be a classic guardian of German financial orthodoxy.

It isn't easy to see any feasible alternative to the Draghi plan, which would also require Europe's political leaders to take the key decisions to make the various rescue funds fully and speedily available and to sell the rescue plan to their dubious voters. And without the strict conditions of structural and budgetary reform, no rescue plan has much chance of success and even less of persuading the markets that they should ever again invest in Spanish or Italian bonds.

The overall European economy continues to shrink. Markit's latest Purchasing Managers' Index signals a contraction in output for the 10th time in 11 months. The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for three years.

So even if this August of 2012 avoids the horrors of war, the financial crisis rolls on into its sixth grim year.

It makes one wonder why T.S. Eliot wrote in his poem "The Waste Land" that "April is the cruelest month," when August seems to have a much grimmer record.