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ECB Considers Massive Purchases of Italian and Spanish Bonds (Update: Eurobazooka Armed)

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Even thought the US media has been fixated on the downgrade of Treasuries to AA+ by Standard and Poor’s, the real risk to the markets is continuing decay in Eurozone sovereign debt. The BBC’s Robert Peston said today that the failure of the ECB to buy Italian bonds would be a Lehman moment. As our Ed Harrison stresses, while some countries like Greece have a solvency crisis and need to have their obligations restructures (as in written down), the stress on Spanish and Italian bonds looks like a classic liquidity crisis. And the concern has spread to the core, as French sovereign debt (remember, rated AAA) was trading at a 90 basis point premium to German bunds. As Ed noted:

The European Central Bank is now deciding how much liquidity to provide because it has received a quid pro quo from Italy that some analysts knew were necessary before the ECB would provide any liquidity….But clearly , since the ECB has unlimited liquidity it could backstop any and all euro-denominated debt issuance if it so chose. The questions now go to how much liquidity the ECB is willing to provide, how much moral hazard it is willing to risk, and what specific conditions it will require before it provides any liquidity at all.

The latest on the ECB from the Wall Street Journal:

European Central Bank officials on Sunday evening were weighing whether to purchase government bonds of Italy and Spain on a massive scale, according to people familiar with the matter, a move that would mark the most dramatic, and controversial, escalation of their nearly two-year effort to stem Europe’s unfolding debt crisis.

ECB intervention to prop up Italy and Spain would be a watershed in Europe’s effort to fight the financial crisis. The central bank has so far insisted that the main responsibility for acting lies with national governments. A decision to buy Italian bonds would be tantamount to accepting that the euro’s member states are unable or unwilling to respond effectively, turning the ECB into the lead firefighter—and the euro zone’s lender of last resort. That could change the nature of Europe’s monetary union.

Sunday’s meeting, which began in the early evening via a video conference, promises to be contentious. The 23-member ECB board was already divided along north-south lines on limited purchases of Irish and Portuguese bonds at the ECB’s meeting last week. At least three central bankers from Northern Europe, including the ECB’s powerful German contingent, resisted the move, the people said.

This is a much more important potential disruptor than the S&P downgrade, which is almost certain to hit stocks rather than Treasuries. Central banks have indicated, not surprisingly, that they will continue to hold Treasuries (note all the Chinese harrumphing contained no specific threat); big foreign money managers have also said that Treasuries are still the most appealing game in town for investors who need safety and liquidity. Wall Street banks confirm our view, that any selloff in Treasuries is likely to be temporary. There are lots of investors that are desperate for yield and any uptick would be welcomed and seized.

But that fact that we have had a debt deal put in place that is massively deflationary, and S&P (and to a lesser degree, Fitch) want further cuts means lower GDP growth and higher unemployment. And where is the place to be in deflation? High quality bonds and cash. Last week’s combination of a large rally in Treasuries, which were already trading at high levels with the debt ceiling negotiations, and falling stock prices, is exactly what you’d expect to see with investors waking up to the risks and consequences of deflation. A failure of the Eurozone to deal with a liquidity crisis induced by its lame response to the rolling solvency crisis in Greece would be another deflationary blow. It would be nice if we could carry off deflation as gracefully as Japan, but they have the social cohesion to settle on a model of shared sacrifice. Our version is certain to be more ugly.

Update 6:00 PM. Via Reuters(hat tip Richard Smith):

The European Central Bank said on Sunday it would “actively implement” its controversial bond-buying programme to fight the euro zone’s debt crisis, signaling it will buy Spanish and Italian government bonds to halt financial market contagion.

After a rare Sunday night conference call, the ECB welcomed announcements by Italy and Spain of new deficit cutting measures and economic reforms as well as a Franco-German pledge that the euro zone’s rescue fund will take responsibility for bond-buying once it is operational, probably in October.

“It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme,” an ECB statement said.

The statement marked a watershed in the ECB’s fire-fighting efforts after modest bond-buying last week failed to stem contagion to the currency bloc’s larger economies.

The text of the ECB’s statement (hat tip the Economic Populist) is underwhelming but if you understand the code, it says the ECB is prepared to step up to the plate in a serious way. How aggressive its intervention winds up being remains to be seen. Investors have a nasty way of liking to test the resolve of parties that will hit their bid. The ECB is not operationally constrained, but it is still unduly worried about inflation in an obviously deflationary environment. So we will see altogether too soon how this plays out.

To put it another way: the Wall Street Journal has signaled what Mr. Market wants, massive purchases or at least a massive commitment. My readers of European press tell me that the signals this weekend was that the ECB wants to nibble only and is trying to prevent panic sales. If this reading is correct, this is a variant on the Paulson “bazooka” strategy of July 2008 with Fannie and Freddie, that if the markets knew he had a bazooka in his pocket, he would not have to use it. We know how that one turned out.

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67 comments

  1. Susan the other

    Our shared sacrifice will be interesting. Maybe ugly; maybe not. Everything is negotiable. We are at a crossroads. So is Europe.

    I look at it this way: it is worth it for the EU. If the United States had an (ongoing) solvency crisis and it pitted north against south, we’d still be fighting the Civil War. And the US Civil War was hideous, godawful and so regrettable we still have not gotten over it emotionally. My father was from the South and right up until he died in the 80s he used to always make the toast “The South will rise again!” He wasn’t a racist, just a southerner. A Quaker, actually.

    What a solvency crisis requires is simply more money in circulation. If there isn’t enough money to make things work, then that is the problem. Print it. And stop with all the nonsense that cannot be justified in any argument.

    The Germans are looking at their sovereign wealth and realizing that all their money can’t finance Europe the way they have rigged it. What an astonishing fact. Well, duh. But they should be looking at a future that distributes burdens equally. That is not being done now, nor has it been since Germany became the export king of Europe. The ECB is on the right track. Just do it.

    1. Susan

      I think the vast, vast majority of Americans have gotten over and healed from the Civil War.

      1. Greg Colvin

        Have you noticed how closely the map of Republican and Democratic states matches the map of Confederate and Union states?

        1. tnjen

          We’re occupied territory. Oddly enough, the old saying that poor people vote democrat while rich folks vote republican is still true and in fact MORE true in the South than elsewhere. (See: What’s the Matter With What’s the Matter With Kansas). The problem is years, hell, centuries, of control by what amounts to rule by aristocrats has depressed voter turnout and otherwise disenfranchised the poor and working class while middle and upper-middle class white republicans are the most rabid and partisan voters around.

          Population wise we’re not all republican but voter wise they turnout while our party is in shambles.

      2. scraping_by

        The vast majority of Northerners.

        The vast majority of southerners are raised with stories and attitudes of anger, suspicion, particularism, and resentment. The fact that the Confederate constitution was even more antidemocratic in mechanics and intent than the US constitution, that the states they were defending were run by plutocrats who conciously kept it a rule of plutocrats, and that the plantation system marginalized the majority of men who fought to preserve it, none of this matters. They’re just trained to bristle and go silent when they learn your great-great grandfather was with Sherman (my experience).

        Read Shelby Foote’s histories of the Civil War and compare to Bruce Catton’s. These guys are raised on a mythology that keeps them victims. Good place to organize for the corporate party.

        1. tnjen

          Ok, that is just utter and complete bullshit. It’s ignorant regional bigotry, nothing more or less.

        2. Yves Smith Post author

          I suspect the debtcropper system after the war was a more significant factor than the war per se.

    2. nonclassical

      Is this the big picture?

      1) U.S. currently is world leader in “financial services”
      (6 U.S. “investment banks” controlling 95% of $600
      trillion derivatives-futures markets, +world’s largest
      military..

      2) Asia (China, Japan, India) control manufacturing + labor

      3) Europe fighting for control of “financial services”-
      banking, European manufacturing (quite different than
      Asian), with larger market than U.S. now, as “union”..

      All the above negotiating, shoving, competing, for resources
      and new technology..

      In other words, I wonder how much U.S. “financial services”
      is “playing” European Union banking structures…?

      1. nonclassical

        I neglected to note, we lived in Berlin, and will move back
        as quality of life in U.S. is devastated (look forward to
        $5.00 a gallon gas after 2012 election) by continuing attacks upon what small (FDR) benefits and regulations remain..

        This certainly looks Orwellian..

        1. bmeisen

          Living in Germany I don’t have a problem with the current gas price, Euro 1.5 / liter, about $8 / gal. It should be higher for gas guzzlers, which in Germany tend to be driven by the rich. In the US even the poor drive gas guzzlers, right?

          I bet that the second-to-last thing to change in the US will be the gas price. If it gets up to European levels then that will be a “game over” light flashing on the American pinball machine.

          Why are most Americans still willing victims of the regime? Because they equate freedom with getting into a car and driving to the mall. Driving my car = high quality of life. When individual mobility as Americans know it becomes impossible then the system – both economic and intellectual – collapses.

          Maybe if they were willing or easily able to compare their experience with that of citizens in comparably wealthy countries then things would be more likely to change. But the dominant perception that Americans are at heart the freeest, most virtuous people on earth makes it hard to be critical.

    3. Linus Huber

      Well, printing more money is the presciption that has been followed over the past few years; in actuality it means increase the level of debt further and further. The real problem is that we have too much debt already and it is not sustainable to continue on the present path. You can make an alcoholic feel good by using a bottle of jack daniels as medicine but you are not going to heal him with it. But that is exactly what these corrupt leaders are doing and sticking the bill to the tax payer.

      1. Maju

        Printing money is not debt: printing money (everything else equal) means inflation. If the government is indebted it is because it has not printed money, but borrowed it instead.

        Borrowing and printing are different things: both imply a deficit budget but the means of running that deficit are different: one burdens the state with ever-growing debt and interests, the other burdens society with every-growing prices (or ever-shrinking money value).

        In the quite peculiar US case, you end printing money to devalue it to pay less for debt denominated in dollars… but that only happens in the USA and is privilege of the hegemon (in the 19th century it was Britain who did that, though the gold standard limited somewhat the room for maneuver). Also thanks to that hegemonic status, to the “gold status” of the dollar, the USA scatters some of its own inflation abroad.

        In any other state printing money does not help at all with paying the public debt (except if denominated in local currency – not too common), though it can be used preventively to avoid taking up more debt than can be managed. But it comes with the cost of inflation, so it can only be used with care (hyper-inflation is a very difficult and undesirable economic reality).

  2. jimmy james

    I have to admit, I’m not as plugged in to EU politics as I’d like to be, but I just can’t see the ECB directly monetizing a significant portion of member countries’ debt without a gigantic uproar out of Germany.

    We are all helicopters now?

    1. Maju

      Half the German public opinion is solidarious with the rest of the Eurozone/EU and are well aware that alone they can’t do anything. The other half is a problem… but it’s a problem for German leaders, it should not be a problem for the EU as a whole.

      Anyhow, whatever Germans think, react, perform theatrically, throw xenophobic insults around… what can they do? They are minority now that the “contagion” threatens France too.

      Germany is not going to walk out the euro nor there’s going to be any state kicked (unless maybe in a revolutionary stage or who knows, not in the short run anyhow).

      But it would be fun to watch if they quit the Eurozone/EU, considering that it’s their main “export” market. Where are they going to export to if EU fails or they get out? Let’s be serious: Germany has been the main beneficiary of the euro and is the one who has most to lose if they leave. Returning to the DM may sound good on paper but the euro is in fact nothing but an expanded DM, providing German companies with a huge almost exclusive market.

      What the EU needs, and needed three or even ten years ago, is a pact to keep the euro near parity with the US dollar, like China does, that may not solve all problems but would have helped a lot. It is the hyper-strong euro which is the main cause of all EU’s problems.

  3. Jim Haygood

    This is the full text of a joint statement issued on Sunday by German Chancellor Angela Merkel and French President Nicolas Sarkozy on measures to tackle the euro zone debt crisis.

    President Sarkozy and Chancellor Merkel reiterate their commitment to fully implement the decisions taken by the heads of state and government of the euro area and the EU institutions on July 21st 2011.

    In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries.

    They welcome the recent measures announced by Italy and Spain with regard to faster fiscal consolidation and improved competitiveness. Especially the Italian authorities’ goal to achieve a balanced budget a year earlier than previously envisaged is of fundamental importance. They stress that complete and speedy implementation of the announced measures is key to restore market confidence.

    As decided on July 21st, the effectiveness of the EFSF will be improved and its flexibility increased linked to appropriate conditionality, in particular through the following instruments: precautionary program, finance recapitalization of financial institutions and to intervene in secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the member states, in order to avoid contagion.

    ‘Swiftly by the end of September’ says it all, about how delusional this pair is. That’s seven weeks from now, in a market whose long-term time horizon is tomorrow morning.

    They harp on the July 21st accord to extend Greek maturities and impose a ‘too little, too late’ 21 percent haircut on banks holding Greek debt. July 21st constituted the inflection point at which the selloff in Spanish and Italian debt intensified.

    And logically enough, too. With the euro zone committed to pegging Greek debt at unsustainable levels and pouring good money after bad, our task is to sell all the unpegged euro zone debt — Spain, Italy, Belgium, France — until they scream ‘uncle.’

    This incoherent, deranged word salad from ‘leaders’ who have clearly lost their grip on reality should succeed in tipping European debt markets over the edge of the abyss tomorrow. Sell till your fingertips bleed from banging the Enter key!

    By the way, John Mauldin endorses Yves Smith’s view on Treasury yields:

    Side bet for Monday. This could make me look like an idiot, but I think Treasury yields fall as the risk-off trade increases. Can this come at a worse time for a nervous market? By the way, maybe you want to go long Kimberly Clark, as they make Depends (the adult diapers here in the US, for my non-US readers), because sales are going to skyrocket all across the financial markets.

    http://www.safehaven.com/article/22056/the-case-for-going-global-is-stronger-than-ever

    Folks, nobody is in charge in the euro-asylum. Trichet is a short-timer, about to retire. Europe’s political leaders are out on holiday, and out to lunch. Time for a step-function repricing of risk on the lost continent of Europe.

    So long, and thanks for all the fish!

    1. Maju

      It’s pointless to expect that parliaments will gather before September. The stock markets should also close for August everywhere, don’t brokers need vacations?

      Markets seem hysterical (we’ll see tomorrow Monday anyhow) but nobody really knows why. What’s different now in August in relation to, say, May or July? That farce of US debt ceiling non-debate? We knew from the beginning it was just a farce to degrade welfare and work conditions one notch more, we knew from the beginning it was mere posing for the gallery. The media and the brokers (and the rating agencies) are reacting as if they could not discern posing from real. What the heck? It’s such a show!

      1. Jim Haygood

        What’s different, I’d say, is the July 22nd accord that Merkel and Sarkozy allude to. It made clear that the EU has no intention of restructuring its insolvent members, but rather intends to throw good money after bad.

        This being the case, selling Spanish and Italian debt becomes a one-way bet. If Spain and Italy subscribe to an expanded EFSF, then their debt load becomes even heavier, and yields must rise. If they don’t, then Germany alone is not big enough to rescue their bonds, and the result is the same.

        As the brokers on Wall Street say, ‘You can’t lose.’

        And no — brokers don’t need vacations. Trading is all done by robots now.

        1. ajax

          I agree that yields of 10-year Spanish and Italian bonds
          issued in 2006 and maturing in 2016 will rise if there
          is enough selling, i.e. as supply of the bonds for sale
          gears up, demand has to catch up, pushing down prices
          of the bonds and pushing the Italian/Spanish bond yields up.

          What’s not clear to me is that yields on the same
          10-year bonds will still be high a year from now.
          For example, if the European
          Financial Stability Facility and ECB got more
          delegated/new authority to buy Spanish
          and Italian bonds between now and a year from now,
          arguably the price of the 10-year bonds issued
          in 2006 and maturing in 2016 might well
          increase, in response to dramatically increased
          bond-buying by the ECB.

          In short, I agree with you that yields on Spanish
          and Italian bonds could remain high into
          September and even October. As for yields
          on the same bonds in August 2012, I’d
          suggest it’s quite uncertain what they’ll be
          compared to the yields we’ve seen in the
          past week …

          P.S. For newly issued bonds (say in Sept. 2011),
          I’m not an expert, but anyway the bond
          issuers might have to offer competitive
          interest rates (close to the yield of
          existing bonds).

          1. Cedric Regula

            Far as I know the EFSF isn’t funded yet. I’m pretty sure Merkle hasn’t been saving up a trill or two or three in her mattress in case she was tasked to bail out Italy and Spain. So plan B, I think, was to sell super EU bonds – taxpayer backed by AAA countries – to fund the EFSF.

            But that hasn’t happened yet. In the meanwhile, the ECB is basically doing QE, except they don’t use that term there, probably because it lacks meaning.

            Then if the EFSF doesn’t generate a lot of interest, the ECB is stuck with all the bonds. Then the bond and currency markets will want to know what the ECB exit strategy is, or in other words, what does the ECB intend to do with the bonds.

          2. ajax

            This is to thank Cedric Regula. Although I know more
            than I used to about the Euro and the Economic and
            Monetary Union (the EMU), it’s still not much.

    2. nonclassical

      You obviously missed the (Danish leadership) confrontation over adding Eastern European nations to EU…

      Leadership certainly outperformed U.S. over the last 35 years..and with far, far fewer LIES to their people…

  4. MyLessThanPrimeBeef

    I wonder if this is what it was like at the end for Rome, as she retreated belatedly from Britain and other peripheral possessions to save herself to no avail.

    1. Jumpjet

      The Romans moved east and held on to a decent chunk of imperium for at least 700 more years. I don’t think there’s a Justinian coming down the pipe in Europe right now. I’d love to be proven wrong, though.

      1. Maju

        The move East was the cause of the debacle of Rome, mind you. This is basic economic history: when the capital was moved from Rome to Constantinople (or later when the Empire was divided) the Western Empire stopped having any meaning whatsoever. All the conquests in Gaul, Spain and surroundings only mattered for Rome and Italy, and were totally pointless from a Helenistic point of view.

        Also, as the subordination of the wealthy Helenistic World to Rome was ended, Rome lacked tax resources.

        All rotated around Rome the city and Italy, when this keystone was removed the whole arch fell… a residual Hellenistic pillar stood for some time but was quickly eroded whatever you may think. Even Justinian was nothing but the swan’s song.

        Anyhow I fail to see how the situation compares, because there is no “Roman Empire” anywhere, at most a Roman Republic of sorts in Washington DC. If the EU is heir to any historical state that’s Charlemagne’s Empire but in its real works it reminds more of the HRE in fact: a fiction of an empire in perpetual internal fights.

        1. nonclassical

          Pax Americana..$1 trillion per year on military…up from
          $388 Billion under Clinton..

        2. Jumpjet

          ‘Quickly’? The Eastern Romans (I refuse to disrespect them by calling them the Byzantines) lasted in strength for, as I said, almost 700 years. They withered and faded, it is true, but not quickly- hardly quickly.

          1. Maju

            250 years roughly. Once lost Egypt and Syria, it was not much more of what could be Turkey today. Not anything I’d call an “empire” but in name, just a large national Greek state.

  5. Maju

    Good news, albeit maybe too late. The states cannot purchase their own bonds unless they breach the Eurozone’s money-printing discipline, so that the ECB does it is only natural.

    Hopefully it will imply a slow but steady devaluation of the euro, which should be helpful to the Eurozone’s economy.

    1. Linus Huber

      It is correct that all countries hope to devalue their currency compared to other currencies in the hope to increase their exports. Looking at the value of all currencies you simply have to follow the price of gold and you see everybody is devaluing. It is a crazy game to the bottom. All that is done is pile more debt onto more debt onto more debt and sticking the bill to the tax payer. This is called a ponzi scheme and those in charge should be rotting in jail instead of hanging onto their perky jobs. It will take time until the populace will realize what crime has been committed against them. But once the realization sinks in, extremist parties will be elected and haunt down those culprits (including the bankers who abused their previledge to create money) who kept a corrupt system running until it collapses completely.

      1. Maju

        All countries but Germany – because they export high value goods with little competence and import cheaply everything else.

        I know that competitive devaluation is a “crazy game” but counter-competitive valuation, what has happened with the €uro in the last decade, appreciating 45% in relation to the U$ dollar, is totally suicidal. Maybe most blame lies in the USA but the EU has accepted it suicidally, because of German caprice, and now we are paying for it – and we are paying way too much.

    1. nonclassical

      We in NW + Alaska know fishermen fight the sea all the time-
      “perfect storm” is new-wave “destiny” rationalization…

      It is humanity who threatens humanity…

  6. F. Beard

    It would be nice if we could carry off deflation as gracefully as Japan, but they have the social cohesion to settle on a model of shared sacrifice. Our version is certain to be more ugly. Yves Smith

    Why accept deflation? Just put the banks out of the counterfeiting business and send bailout checks to the entire US population equal in total to the amount of credit paid off each month.

    As far as I can tell, the above solution would fix everyone including the banks without increasing (or decreasing) the money supply. It would just replace so-called “credit” (which is essentially counterfeit money) with genuine legal tender fiat.

    And an advantage over principal reduction is that savers would receive an equal amount too which is an important ethical and political consideration.

  7. Jim Haygood

    The sixth and final point from Trichet’s statement this evening:

    ’6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.’

    Excusez-moi, Monsieur, but what the fork does this mean? Are you, or are you not, buying Spanish and Italian bonds tomorrow?

    Don’t ask me to read your lips. Show me the freaking bazooka!

    1. Jim Haygood

      p.s. Gold pops to $1,690 at the Sunday night open. Here’s the Daily News version:

      GOLD TO TRICHET: DROP DEAD

    2. Robert Oak

      The definition of Securities Market Programme is buying up public securities, i.e. sovereign bonds. It can also mean buying up derivatives, stocks, whatever, the ECB notes public and private.

      1. Cedric Regula

        English translation is the ECB knows already if it tries to loan cheap money to banks to buy crappy bonds, the banks won’t do it because they have crappy bonds already.

        The ECB knows it only can do two things:

        1) Buy old crappy bonds from banks.

        2) Buy new crappy bonds from sovereigns so they can pay off on the old crappy bonds the banks hold.

        Trichet mutters to himself that he doesn’t know what this has to do with monetary policy, but that will be a problem for his successor to deal with.

        Let the games begin!

        1. psychohistorian

          Thanks Cedric,

          You just have to laugh at the coming machinations of “monetary policy” by “sovereign” countries to keep the global inherited rich happy.

          Is there a leader out there talking about nationalization of anything or are they all bent over with the puppet masters driving?

          This Shock Doctrine moment brought to you by the global inherited rich and their minions that keep getting away with societal destruction…..more whipping massa, more whipping…

          Where is the global will to stop this victimization?

          1. Cedric Regula

            I think they are truly scared to death what it may cost to nationalize Bankenstein.

            The last big nationalization I can remember off the top of my head was Sweden back in 1990 or so. That was in far simpler times, no $600 trillion global derivatives market and things like that.

    3. Linus Huber

      “taking account of dysfunctional market segments”
      what a joke, the market is functioning perfectly; the only thing that is dysfunctional is the idea that these people can manipulate the market to their liking. If someone’s credit is at risk of being repaid, it is obvious that the market will demand higher rates. There is nothing wrong with that. To interfer into the market place and stick the costs of it to the tax payer however is the real dysfunctioning part. In my opinion it is criminal and I hope those who responsible for it, will hopefully rot in jail one day, after the populace realized how they have been fleezed and after electing leaders who will prosecute those culprits.

  8. RueTheDay

    “The European Central Bank is now deciding how much liquidity to provide because it has received a quid pro quo from Italy that some analysts knew were necessary before the ECB would provide any liquidity.”

    Why is a quid pro quo (presumably in the form of some sort of deficit reduction target commitment) necessary before providing liquidity in a crisis? If a nuclear power plant is malfunctioning and hours away from a catastrophic meltdown, does the NRC ask for statutory electricity rate concessions before helping to address the meltdown? This is silliness.

    Banks placed big bets and lost. Their failure threatened collateral damage, and so the taxpayer bailed them out. Now central banks are bailing out the taxpayer. All to ensure that a small number of unimaginably wealthy global financiers would be made whole. I find myself using utility analogies (such as the one above) in no small part because banking simply needs to become a utility at this point in time. Separate out the socially useful utility functions like provision of a payments system, a credit system, and a clearance and settlements system out from the casino. Let the casino continue to operate, separate and walled off from the utility system, and restricted to gambling only with its investors’ capital and no explicit or implicit leverage.

    1. Jessica

      With your permission, I would like to add that no corporation that provides jobs to anyone other than gamblers is allowed to use their corporate funds in the casino either. And no pension funds.
      I think this is in the spirit of “no gambling with other people’s well-being”.

  9. Jim Haygood

    From an NYT article:

    [Carl] Weinberg [of High Frequency Economics] said that even the European Central Bank would be hard-pressed to buy enough bonds to hold down yields on Spanish and Italian debt in the long term and to prevent the countries’ borrowing costs from reaching levels that would eventually prove ruinous.

    http://www.nytimes.com/2011/08/08/business/global/as-market-tension-builds-world-leaders-ponder-response.html?pagewanted=2&hp

    Right — ECB buying of Greek, Irish and Portuguese debt didn’t prevent their yields from rising into the teens and twenties.

    So now they’re going to do the same thing with Italian and Spanish debt, expecting different results? Even lab rats exhibit better learning capacity than this.

    The ECB is being turned into a AIG-style garbage barge. Trichet is the Ken Lay of central banking.

    1. Linus Huber

      Correct, I agree 100% with this statement. This guy should not run a Central Bank but rot in jail.

  10. K Ackermann

    Futures are way off.

    Volatility is looking familiar. Wait until the first hiccup in liquidity.

  11. Jim Haygood

    From the G7 statement:

    ‘The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.’

    http://www.bloomberg.com/news/2011-08-07/full-text-g-7-statement-on-renewed-strains-.html

    In other words, they rule out restructuring of Irish and Portuguese debt, which already trades at de facto default yields.

    ‘Extend and pretend’ is now official G7 policy.

    This is madness — nihilistic, grandiose, raving madness. Suicide of the West, as it were. We’re not only financially, but intellectually bankrupt.

    1. F. Beard

      We’re not only financially, but intellectually bankrupt.
      Jim Haygood

      Don’t forget morally. A bailout of the entire population, the just thing to do, would fix everyone from the bottom up including the banks.

    2. Maju

      An Irish default (which I do not oppose because I think that banks must pay and end up being nationalized after due fast-track bankruptcy process) could demolish German and British banks. After absorbing the debts of those toxic banks, the Irish state owes almost as much as Spain, a state almost ten times its size in population and GDP, does.

      A Portuguese default would be not much larger than than of Greece (and therefore not too relevant) but the most exposed banks are Spanish ones and that would add a lot to the instable position of Spain.

      That’s why they are delaying. And considering the circumstances and their narrow-sightedness (i.e. no socialist solutions in the first-aid box) delaying may be a good move, because at least part of the problem is merely speculative.

  12. razzz

    The results will be the same everywhere in the world as this banking system knows no borders.

    It will take much more pain than this to dislodge the banksters from using this stick and carrot routine, over and over again.

    Downgrades are just a leveraging to force more borrowing. The US should have been downgraded long ago. Banksters received bailouts QE-1&2 and now are pouting for QE-3.

    The result of the big US debt limit crisis was pretend and extend, gonna take a lot of pain to force Congress into a corner. It will happen…eventually.

    Gold is the ultimate ‘full faith and credit’ confidence indicator for fiat.

    click here

    1. F. Beard

      Gold is merely the fall back tool of oppression for the usury and counterfeiting cartel.

      Fiat is not the problem; government support for the banking system is.

      1. psychohistorian

        While I agree whole heartedly with the second part of your comment I don’t appreciate being lumped in with the usury and counterfeiting cartel just because i don’t believe in the long term viability of the US dollar and am all over conserving what little capital I have left in my life.

        1. F. Beard

          Gold since it is a mostly useless metal is certainly in a bubble unless the cartel can convince enough people that it should be remonetized in which case all gold owners score a huge windfall.

          Silver, being much more useful, is less likely to be in a bubble. Plus historically, gold has been more a tool of oppression than gold.

          It’s tragic that the bankers have created a “dearth of investment opportunities”. Hopefully, you will sell your PMs to the usury and counterfeiting cartel at the peak price.

          1. F. Beard

            correction “Plus historically, gold has been more a tool of oppression than silver.”

      2. Skippy

        The amount of ore (un-weathered rock {toxic}) one must dig up to extract this soft metal, is absurd, not to mention the refining process (heavy toxicity mitigation required) and energy expended…..is well…..MORONIC.

        Skippy….same same for precious stones. can you say 3rd world hydraulic mining. I knew_you_could.

        1. F. Beard

          Excellent points. Gold is such a flawed solution to the money problem that it is a testament to how screwed up the present system is that some people take it seriously.

          Not me though.

          1. Skippy

            Yep…pure unadulterated_with intent_manufactured scarcity.

            Skippy…Golden chains…ROFLOL…the…IRONY…is just so…ABSURD[!!!!]. Made into a social status…yet some decry Ivory…Fur…stop me…ehlp![lol] Its like crossing a raging river with hundreds of rounds of ammo, whilst hunting rabbit arrgghh!

          2. razzz

            I did say gold was an indicator. Some say you can’t eat gold others say you can’t eat without it.

            More along your line of thinking is this…”Had we just printed money and NOT borrowed this would have eliminated 68.2% of the entire national debt. There would have been
            NO competition with the private sector to borrow reducing economic growth, raising unemployment, and causing taxes to rise.

            We would NOT need a credit rating and inflation would have been at least half the rate over the last two decades. It costs MORE to borrow than it does to print and there is NO empirical evidence that borrowing is less inflationary than printing. Oh well! That’s just another of those stupid myths.

            To make matters worse, 46% of these interest expenditures are exported and have just ABSOLUTELY NO domestic stimulus affect whatsoever.

            So ya! Get those rich bastards. Tax all their money to export it and stimulate the world. Keep that theory going and you should succeed in accomplishing the socialist goal of the perfect world.”
            Link

            [Still waiting for that interest free bank]

          3. Linus Huber

            well, Beard, I am actually surprised that you seem to reject the idea that gold has the ability to store value. I personally think (when looking back over many centuries) gold has its inherent quality of wealth storage against the back drop of the devaluation of currencies and slow but grinding loss of confidence in the leadership and their policies of piling debt upon debt.

          4. Skippy

            @Linus Huber.

            Debt based systems only work when people can pay it back. We seem to have an increasing problem with that aspect…eh. Capital chases the path of least resistance, highest amplitude, in the shortest timeline, jobs are Anathema to it.

            So in fixing the problem, cut to the bone, we shed more of what we need in the currant system to settle accounts. Hence the need to reduce liability’s (SSN…+) looking forward in light of the pain felt with increasing write-offs of securitized dreck.

            Skippy…gold et al was a choice made by whom and for whom in mind[?]. gold coins were called sovereigns for a reason in some parts, they belonged to royalty…eh…not much has change in that regard.

  13. john

    If the bazooka shoots money, why in the world would anyone think that it wouldn’t get used?!?

    1. Cedric Regula

      Shooting Bankenstein takes more firepower than a bazooka has.

      Also, the ECB’s charter says they can’t use bazookas, so Trichet has already broken the rules by using the QE bazooka as much as he had already.

      Technically, he may have to ask permission from someone, we don’t really know who yet, to fire enough shots to hugely inflate the ECB balance sheet. Then outright monetization would be the next step. We can expect some arguments there, but hay…what’s $5 trillion among sovereigns?

  14. DavidE

    Just ticked off at this “Lehman moment” nonsense. I am not sure Hank Paulsen did anything right as Secretary of Treasury but if he did anything right, it was not bailout out Lehman Brothers. The mistake that the Paulsen/Geithner team made was letting Lehman stay in business even though they knew it was insolvent. The sooner that companies like Lehman, Bear Stearns, Countrywide and IndyMac were forced to shut down, the less damage they could have done.

    1. Banks Own the Courts

      Attrition continues from these criminally mismanaged institutions, the media was told to abandon the foreclosure controversies and glaze over them with housing sprouts, or some such. By the way, and in layman’s terms that were overhead at the grocery store ‘Hank Paulson is the key fucker who extorted in 2008, nothing positive to say about this high level asshole/crook.’

  15. Hugh

    I agree with Jim Haygood above. The crisis is now. It is rather like your house is burning down and the fire department tells you that they will be out in a couple of months to take care of it. The cognitive dissonance in that is nearly lethal.

    From a kleptocratic perspective, it is important to realize that none of these many, many euro-fixes are meant to fix anything. Their purpose is to pressure countries into bad deals and austerity programs, in other words further looting opportunities.

    It also bears repeating that a crash is something we do not want. But this is not true of kleptocrats. As the 2008 meltdown demonstrated, what was a disaster for us was not a disaster for them. They came out of it with an even greater control of the financial and political systems than they had going in.

    The short form of this is that the kleptocrats will loot until there is a crash and then they will loot the crash. Short of a revolution, they win either way. So why would they do anything differently than they are now?

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