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Jean-Claude Trichet
Stocks are closed in the US today, but they are falling precipitously in Europe, as the continent continues to struggle. European leaders still cling to the fallacy that they are in the midst of a debt crisis, when a bank crisis is more to the point. An austerity crisis, too.
But the elites still demand more beatings. The head of the European Central Bank, Jean-Claude Trichet, warned Italy that they must soldier on with austerity measures, after their Parliament failed to pass legislation to that effect. The ECB basically threatened to slow down or stop its purchases of Italian debt if the austerity programs aren’t put into place, which would raise borrowing costs for Italy to unsustainable levels. But this is akin to the ECB putting a gun to its own head. European banks would suffer if Italy faced a Greek-style collapse, and they cannot afford any kind of losses at this point. Bank stocks are the ones taking the brunt of the pain right now:
Financial shares led the declines. Royal Bank of Scotland gave up more than 10 percent, while Barclays, Deutsche Bank, BNP Paribas and Société Générale all fell more than 6 percent.
“The banking sector is at the center of this turmoil,” Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said. Flows of speculative money into bank shares are exacerbating the volatility of the stocks, he noted.
In addition to growing expectations that many financial institutions will need to raise capital — as the head of the International Monetary Fund, Christine Lagarde, suggested last month — banks have also been hit by a lawsuit filed by the U.S. authorities against 17 financial institutions that sold the mortgage giants Fannie Mae and Freddie Mac nearly $200 billion in mortgage-backed securities that later soured.
The European Commission is putting on a brave face, saying there will be no return to recession. But John Lanchester has this pegged right: a lack of growth means that Eurozone countries will have problems paying their debts, and as a result the European banks, which are in horrendous shape, will falter.
It’s lucky I’m not a trader actively involved in the financial markets, because if I were, I would have permanently lost my shirt – I would have ‘blown up’, as traders call it – in 2009, betting everything I own against the euro, on the basis that its banks were just as broke as the ‘Anglo-Saxon’ ones, with the only difference being that they hadn’t admitted it yet. They still haven’t admitted it. [...]
In the case of the current euro crisis, hedge funds are shorting specific banks, principally European ones, which they believe to be undercapitalised, as per Gordon Brown above. (Just because they’re evil doesn’t mean they’re wrong on the substantive point.) The European governments reacted in the way they tend to do, by issuing a temporary ban on short-selling in France, Belgium, Italy and Spain – a not-so-subtle clue as to the location of the targeted banks. Crying ‘foul’ in this manner doesn’t impress the markets much, and the banks’ predicament worsened. The European Central Bank figures tell the story: in a single week, they provided €22 billion in emergency funding. The total amount of support to one (unnamed) bank amounted to $500 million. ECB lending on that scale can’t be kept up, but numbers that big are necessary because other banks had stopped lending to the endangered banks – and banks being scared to lend to other banks is the exact formula which didn’t just cause the credit crunch, it was the credit crunch.
There are options for Europe. They could sell eurobonds to ward off the rapacious markets from the PIIGS countries and put the entire Eurozone behind the debt. They could break up the euro and allow the countries in trouble to deflate their currency. They could end this austerity that is killing economic growth and increasing deficits. It’s a sad commentary that the European country with one of the larger increases in GDP was Belgium, which has had no functioning government for 15 months, and as such has not instituted austerity measures, keeping government spending relatively high.
Finally, as Lanchester writes, the entire world, Europe and the US as well, could stop the madness of the financial sector driving policy decisions, and instead regulate the banks as a public utility. European too-big-to-fail banks are clearly the impetus for the austerity fever that has gripped the continent. The developing world is marked for a decade of pain where deleveraging occurs and banks are shoveled money to grow their way out of their problems. But when the finance sector must grow, countries have to take a back seat. And even then, they are simply too indebted, too troubled, to follow this plan. Big Shitpile still follows the banks wherever they go, and they cannot escape.
But we’re not going to do any of these things, Lanchester concludes, and I agree with him. “I fear that the grip of anti-spending ideology is so strong throughout the West, and the politicians’ fear of the banks is so entrenched, that the ten-year slog looks more likely.” What year are we in now, so I can set my calendar?
Photo by Monika Flueckiger for World Economic Forum swiss-image.ch under Creative Commons license
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Just one more thing the neo-libs have totally failed to get right is foreign policy and that good old-fashioned “leader of the free world” business. It is not escalation in Afghanistan or dilly dallying in Libya, it’s leading the G.D. first world economies in a direction other than down the toilet.
Wonder when we’ll hear of the swap lines the FED is providing the banks and ECB.
Someday, but probably not someday soon, we will have the history of this sorry episode in economic policy. I have been trying to think through the twisted logic of the European banking and policy establishment and so far haven’t been able to make any sense of it. It’s not like in the US, where the banks have bought and paid for the US government. Governments in Europe are still independent, at least in that sense. And it’s not that the economists and high-level functionaries are stupid (UK a possible exception). The recruitment competitions for these posts is ruthless.
So what’s the reason? What’s the model?
One reason that has been widely bruited about, and I think is mostly correct, is that the banks in the two major economies (France and Germany) are up to their ears in bad euro-government debt, and the finance ministries of the respective countries fear that their collapse will throw the EU into a deep recession. Of course, their contractionary policies are doing the same thing, but this doesn’t seem to have occurred to them. It’s the same banking model that has driven Geithner’s catastrophic tenure at the Treasury. Still, it’s hard to see how a full-fledged banking crisis of the kind they fear would be worse than what is now unfolding — slow death by self-asphyxiation.
The willful rejection of the commonplaces of macroeconomics has got to be explained. I don’t think conspiracy theories explain it. But the monumental stupidity of it all boggles the imagination. It’s as if they were deer caught in the headlights. And in the end, maybe that’s it. Second-rate players.
What’s the worst we’re all facing now? Collapsing banks in Europe and/or in the US? Let them collapse. The day after a massive bank collapse, all of the physical economy in the US will still exist. All of the same work force will still exist. All of the same technology and technical capabilities will still exist. The US government will still exist, and will have the same tools to use to address economic problems impacting the broad working population.
What *won’t* exist is some of the banks in existence today. What *won’t* exist is the unimaginable wealth of some of the Pharoah-like figures populating the plutocracy in the US.
Who *cares* about those sons of bitches. Bank tellers are still employable. There are fewer prospects for suddenly impoverished magnates.
We all want grand improvement in the economy, and I am sure it is the same in Europe, but if there is going to be an economic cave-in, I sincerely say: “Let the banks and plutocrats take the first and biggest hits.”
Mindboggling, indeed. It seems we are all second rate players. We just stopped listening to economists. I heard Herman Cain today say he wants a return to the gold standard. Maybe this is how great countries and civilizations fail.
But when banks fail, credit fails and people are on the street.
Bankers are the new gods and banks the new idols. And still the christianist right fantasizes it has displaced idolatry with its own creed. Someone could start educating them by telling them where Wednesday and Friday come from, not to mention the date for Christmas and the true meaning of Easter.
People are in the streets now or as good as. The issue is not that banks fail; many of them should fail for overreaching, for taking excessive, even unknown risks, for outlandish compensation and for attempting to corrupt governments and turn a flat paying field into a funnel feeding their maws.. The issue is how they are then to be reorganized, their business regulated so as to make them more transparent and their risks apparent and muted.
It would be nice if the recent legislation concerning financial regulation actually worked. But I guess it was all just a joke.
For those of us concerned about Collapse (and the horror that must inevitably follow);
a “soft landing” policy is what we should be pitching.
A soft landing is the gradual inflating away of debt, not through loans, but through direct government handouts to all. The powers that be know that this will work, but their fixation on class warfare steers them towards alternatives that seem like Keynesianism, but are not:
i.e. giving trillions to Big Banks.
In response to bluedot12, there was a law called “Sarbanes-Oxley” which, among other things, required CEOs to certify the financial statements of their companies under penalty. This was the response to Enron (along with jailing Martha Stewart), and in so many words it made lying (to shareholders) a crime.
It has not been enforced.
I foresee global crop reductions-climate change-the need to drop the world population quickly. Billions could be lost because the PTB cant see beyond a payday.
Enough is never good enough.
“I fear that the grip of anti-spending ideology is so strong throughout the West, and the politicians’ fear of the banks is so entrenched, that the ten-year slog looks more likely.”
ten-year slog?
They should be so lucky.
How about a complete melt down next spring?
these banks are no longer “to big to fail” they have grown into “to big to save.”
Once the domino effect starts all the governments in the world won’t have the resources left to stop it.
I consider this post to be highly irresponsible. If FD desires to remain relevant in progressive circles then FD needs to be more intelligent in the sort of material that they choose to provide exposure to.
Posting this extremist, subversive material is not helpful and I for one am ashamed of your brazen defiance of acceptable protocol.
If I want stupid conservative austerity crap I can find that easy enough. You guys should know better.
To quote the caterpillar in Alice in Wonderland, ‘who are u?…?
I think the northern Europeans will continue to do fine, the southern and eastern European countries will continue to struggle. They of course have a major crisis on their hands, but I don’t see it resulting in a decade+ of rapidly declining quality of life for those in the northern countries. Otoh, if they keep electing center-right parties to power in the northern European countries, all bets are off. Germany may be turning back to the left nationally. Most of its major cities have been solidly left for many years. Sweden and Denmark’s right is only popular recently due to an influx of refugees (partly due to US/UK/NATO actions in the ME/NA/CA over the past 20 years).
Indeed. This current trouble can be traced precisely to the failure of Germany to provide a large enough stimulus package early on. Timmay Geithner and Paul Krugman both urged Germany to do the correct and wise thing in 2008-09. Merkel bowed to political pressure and elected for a decidedly non keynesian course. As a consequence now all of Europe is suffering.
Worse yet is that the contagion is threatening to derail President Barack Obama’s electoral prospects……..In other words screwing the entire world.
Hate to tell ya but the whole damn world is going off the rails. Central banks globally have been buying every ton of gold they can get their crazy hands on, China even!
Barbaric.
The last time I visited Europe was not long after the euro was adopted, and it had sunk just below $0.90. What a deal it was in Amsterdam! I’d go back under a similar exchange rate for more cheese and Van Goghs — that’s assuming they haven’t levied new, confiscatory taxes on defenseless visitors to pay their bills. Sinful thoughts, no?
I think it was a bad mistake adopting that currency, and the Eurozone boosters should have had their knuckles rapped. They weren’t stupid, but simply didn’t appreciate the nature of people to cheat the system as needed and when possible, which they did. It was the comfy, easy thing to do for so long, and to ignore. Willful blindness.