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More on the European Bank Bailout

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Cross-posted from Credit Writedowns

Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I haven’t been active on the e-mail chain, but I did find some of the commentary interesting.

I had a few comments of note I wanted to address, but here’s why I am writing this post:

“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.”

When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).

I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.

Here’s what I think is happening:

  1. European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.
  2. In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.
  3. Even so, the ECB has now been forced because of the wholesale market bank run now ongoing in Europe to go further. In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks.
  4. But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.
  5. Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.

If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen. And that means, European politicians need to get that rabbit out of the hat soon because things will most certainly continue to deteriorate.

Comments and insights appreciated

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This entry was posted in Banking industry, Curiousities, Federal Reserve, Free markets and their discontents, Guest Post, Moral hazard on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

60 comments

    1. Ransome

      He doesn’t have a choice, this will blow back to our economy in many different ways, pay now or pay later.

      They are falling into a liquidity trap which are/will initiate panic flights to safety. In times of stress, gold increases in value and money substitutes decrease in value with respect to tiered capital, at least until there is a massive paper gold sell off to meet collapsing leveraged positions. Part of the joy of being a multipurpose for-profit money center instead of a bank. One thing that is evident, recent innovation only works with expanding economies and creates one heck of a mess during zero growth or contraction. It’s all about confidence in the political economy, a point that escapes money-getting bankers with a 3 month worldview.

      You have forces at work, common sense knows that debt requires restructuring followed by fiscal stimulus focused on revenue generation and jobs. The banks own cross border high interest debt and will fight re-structuring. We have the same problem with housing. Deep in the banking system are re-remics paying 7% that banks are lobbying not to restructure. My neighbor is caught upside down, medical bills from losing his wife and the bank is waffling between a default, a short sale or a mortgage mod. So far he hasn’t missed a payment on his 7% mortgage.

      1. MyLessThanPrimeBeef

        It’s nice of your neighbor to help out the banksters like that.

        Of course, you are a nice guy too, like many of us, in nursing the banks back to health with your, and our, 0.3% bank accounts.

        Remember, if the lords of the universe are not well, us serfs will not be either. Like accounting identities, that’s the way it is.

        1. Ransome

          Banks need to be treated as what they are, money-getters. A reasonable alternative is a system of non-profit State banking systems that invest locally. The public needs alternates rather than regulation.

          1. Ransome

            Before my neighbor lost his wife to a brain tumor, they had gold plated health insurance. Her condition became more complicated when treatment wiped out her immune system. During the recovery from the immune system procedures she developed an infection. The insurance refused to pay for infection. He was stuck with $70,000 in bills. Every time his dying wife went for treatment, she had to pass through a gauntlet of bill collectors trying to get her to sign away the house. This is privatized health care.

          2. pj

            It’s always about the money. Even when they say it’s about saving your life, it’s always about the money. When they say it’s about helping others, it’s about the money. When they say it’s about exploring space, it’s about the money. When they say it’s about security, it’s about the money.

            When you understand that, everything falls into place.

            Some people might think this is paranoid, others might think it pragmatic. Quite simply, it’s just the way it is. Behave accordingly.

    1. Jim

      Wow. 3.00% to 3.75%, for 3 day to 25 month money. Total amount: 5B up to 7.5B.

      Makes you wonder what the “clean” yield on 10-year debt is.

      I’d have to see the historical relationship between the pagares and 10-year obligations.

          1. F. Beard

            Because paying off existing credit would massively (by 97%?) shrink the money supply.

            So if further credit creation was forbidden then the entire population, including savers, could be sent monthly and equal bailout checks equal in total to the amount of credit paid off the previous month until ALL private debt to the banks was paid off.

            And since the size of the money supply would remain constant, we could expect neither price deflation or price inflation.

            Ironically, the above would fix the banks too. They should be for it except for giving up, at least temporarily, their right to create money (so-called “credit”).

  1. nickj

    off topic, but i’m sick of hearing about lehman moments and how we have to avoid them. Lehman went under and we all lived to tell the tale – now let’s see some more go down.

    1. scraping_by

      Hear, hear.

      The right wing noise machine went from “noun, verb, 9/11″ to “noun, verb, Lehman” with nary a missed step.

      Yet, we’re still with the overblown reactions: sexual assault in the airport, rising debt in the budget, printing money to save any bank anywhere in the world, American military using any Muslim country as a shooting gallery.

      Time to concentrate on reality here and now.

  2. Miles Kendig

    History teaches us that men and nations behave wisely once they have exhausted all other alternatives – Abba Eban

    It seems to me that European monetary and fiscal policy responses have centered upon attempts to “ring-fence” to the minimum extent with a time lag of weeks or months. There is little doubt that greater integration within the Eurozone is what’s needed to make an effective marriage between these varied nations. Fact remains that the whole project as currently structured is highly dependent upon the maintenance of quality relationships across key sectors and countries built upon the trustworthiness of each party and their representations. These special relationships have now been so severely damaged that no matter what action is taken the trust factor under current mechanisms has been severely, probably fatally harmed. This observation underpins my belief that even introduction of euro-bonds and complete subverting of all national sovereignty to Brussels and Frankfurt will fail miserably at stemming this rolling crisis for long. Policy makers and academics may like the idea, but a shotgun wedding is hardly the way most would chose to start a marriage when alternatives to forcing the square peg into the round hole still present themselves.

    I believe that what European officials need to do now is come up with an entirely new structure to achieve integration as the one currently in place has been compromised to such an extent as to make it unworkable. There are tremendous opportunities for the countries of Europe both singly and through integration. Many forget that the Euro project is mostly about creating lasting stability in a region that has been racked by war for most of the past 1000 years. Rather than descending into a sort of 1938′ish like quagmire where everyone loses trust in one another, where circumstances are keeping officials reacting to events with their severe time lag rather than being proactive and the institutions of keeping the peace are found as lacking as The League of nations was found to be it’s time to resolve the present shortcomings. Continued can kicking or muddling through has grown so overused that the can now seems to have sufficient momentum to carry itself willy nilly and on a path of its own choosing.

    The process of creating a new structure should and needs to be approached and executed with greater diligence that the current environment of governance by emergency summit would permit. Rather than look at continued ring-fencing, this time with various levels of default seems akin to a repeat of the terrible tale of sailors for the USS Indianapolis treading water hoping the sharks don’t cull you while waiting for rescue. Tough circumstances require tough and decisive action. It’s time to institute a freeze on all debt payments throughout the Eurozone, public and private until a suitable structure can be agreed upon and instituted. THEN the quagmire of resolving the residuals of the previous structure across all effected segments can be rolled out with a more suitable foundation to support resolution and progression.

    1. Typing Omnkey (ha ha)

      Many forget that the Euro project is mostly about creating lasting stability in a region that has been racked by war for most of the past 1000 years

      And for some reason, many people don’t realize that creating a currency is an absolutely preposterous way to create lasting stability in a place that has been racked by war for most of the past 1000 years. A currency is designed to be a medium of exchange, not a goodwill ambassador!

      What did cause the mostly stable circumstances of the last 70yrs in Europe? Probably massive amounts of sovereign credit, which enabled governments to buy off their citizenry. That’s coming to an end…

    2. Richard Kline

      What Europe did over the last sixty years was to _integrate its economy_. The currency was only the last step, as a logical medium and resolution. It was last because currency union was bitterly resisted by multiple states, for reasons diverse, and even now several states in the political union don’t use the euro. The problem here, of course, is that currency union without fiscal union is a receipie for exactly the kind of blowout souffle we now see. Many knew this instability; few or none expected it to go quite so spectacularly explosive. The political union is indescribibly valuable; it is not going to be relenquished, for many reasons with the end of _two_ millennia of wasting wars at the top of the list. Economic union is not going to be relenquished because it is so extraordinarily profitable when things are on an even keel; in particular, economic union is vastly profitable for the largest and best mangaged regional (formerly national) economies. This implies that when the nut and the throats have to be cut, the necessary, greater, fiscal union will proceed. I suspect it will proceed in a ‘softly, softly’ manner because this is just how the last sixty years state integration have proceeded.

      The reason for the chaotic visuals in Europe follow largely from the fact that we have two, quite different, each hugely contentious issues playing out concurrently. One is a political vector, that of subordinating formerly national fiscs to EU-wide standards and governance. The other is an economic crisis brought on by the a devestated banking sector, made worse by terrible property bubbles and crashes in some regional economies. The first problem is far more important than the second. Both problems have to be solved, or at leasted ‘managed,’ to get an economic resolution. While most commentary focuses on the economic conundrums, it is really the political problem that has driven everything, and around which the moves of political actors revolve. That is my view.

      The subordination of former nation fiscal policies to a common program has been the major issue of European integration, put off, finessed, screamingly argued over, and left to fester until the untended sepsis has now ruptured. Those states who have benefited the most from union, and in some respects have run their economies most successfully, are in a vengeful mood. That vengence is called ‘austerity’ but really it’s not about economics, it’s about politics: the presumed haves mean to dictate policies to the presumed have nots which the latter have refused to implement in many cases through the entire term of European integration. That ‘austerity’ has negative economic conditions in the present matrix really doesn’t matter from the political point of view because it isn’t an economic policy, it’s a political program. (Badly designed for it’s purpose, and ill-imaginged even there, but still.) The have nots cannot leave the Euro, and will not. The downside is that the political actors in the putative haves are dim, unpopular, and incapable of advocating a common policy. There are those behind the scenes, in my view, anxious not to ‘let a crisis go to waste,’ who do not see it as a bad thing that badly managed, recalcitrant, members of the currency union have their kneecaps and fingers broken, and from that mental standpoint a piddling thing like a banking crisis is small beer in a thimblecup.

      I think three things are likely in outcome from the present three act opera. First, the putative havew will win in that the have nots _will_ be compelled into a subordinate fiscal policy more convergent with that of the economically larger member states. Second, regarding the banks when the nut has to be cut I suspect that the real rotten zombies will be ‘nationalized,’ i.e. the EU member states in which they are domiciled will be told to seize them statutorily and take responsibility for ‘their banks’ debts.’ There will be no bailout, which is why the EU finance ministers have nothing to say to Geithner, who surely advocates a huge bailout, except, “Get your privately owned ass back on the plane, Timmy Boy.” Third, there will be ‘studies done’ on how to accelerate actual fiscal union. Many of the haves don’t want real, EU-wide union; they only want ‘those pigs’ to have to knuckle under. This is why those who have resigned from the ECB have left, in my view: they opppose _their_ countries to have to surrender nominal economic autonomy BUT HAVE LOST THAT POLICY DEBATE. We will end up with a working majority of ‘unionists’ in control of the central institutions, notably the European Commission and the European Central Bank. So the end result of integration wouldn’t be just that Greece has to stop paying out money it doesn’t have but that Germany will have to support exchange rates that aren’t death for some of the weaker member states and accept EU wide bond issuance authority to pay for economic transfer amongst member states.

      In conclusion, I don’t see bailouts as at all likely in the eurozone: nationalizations are more likely. Integration will advance, largely through a fait accompli, with the mechanisms to control it lagging behind just as has been the process for several generations in Europe.

      1. Richard Kline

        I neglected to add two trailing points. First, Yves I agree that the ‘coordinated liquidity announcement’ is a passion play to give the ECB cover for taking necessary liquidity actions opposed by some members. And second, if, as I suggest, EU member states ultimately seize and ‘restructure’ large failed banks, i.e. nationalize them, whether closing them or not, this will have HUGE political implications for the USA, who has done exactly _not_ that but instead given literally trillions of dollars to corrupt crony oligarchs. To me, THIS is the ‘systemic crisis’ that the Fed and the US Treasury really fear, that Europe will shoot their banks, exposing American banks as the rotting zombies which must go which, in fact, they are and have been for four years. Political pressure in the US to close huge failed banks will be colossal if the Europeans do so first.

        All I can say is, “Gentleman, take aim—and headshots only.”

        1. marc fleury

          pffff, I don’t know. I don’t care about the greek outcome, it is peanuts on a large EU scale (2% GDP), so if they leave, if they stay the only hit is to them. The political ‘conumdrum’ is a lot simpler, it just says “pay your taxes”, they don’t in greece, they do in germany. I do NOT think nationalization is the way, BNP is way too big from a balance sheet standpoint for france. I do believe in a tarp like solution. Where I am puzzled is that I know that the ‘liquidity drought” was triggered and coordinated from the US. G boy coming over here may be for show since we already have the swap lines. That the euro has been bothering the dollar is plain for all to see. We will see where the chips fall

      2. Miles Kendig

        Well said Richard.

        I observe that creation and implementation of a common currency was never intended to be the last step else there wouldn’t have been all the discussion over time culminating with today’s implied imperative to further economic federalization through a common bond as a panacea to stop the hemorrhaging. As you well note there have been and continue to be many hurdles with implementing a truly federal governing system throughout Europe. Not least of these are the deeply rooted beliefs in national/regional prerogative. This leads me to recall Henry Kissinger’s famous observation [paraphrasing]; A nation and no interest beyond self-interest. Changing this perception appears to be vastly simplified in the case of a “Provence” like Greece, with its current systemic issues. However, I challenge anyone to sell the concept of truly total provincial status to Germany [and its Constitutional Court], France [We deserve all the prime decision making roles because of _______] or the most notable exception to accepting the common currency and full political integration, the UK.

        Regardless of where ones opinion falls it is this very condition that all parties to the EMU/EU recognized at the time of monetary union. I would advance the argument that the widely viewed shortcomings inherent in the current structure, notably the question of monetary union without fiscal union was understood deferred until such occasion arose to place it front and center for resolution. This occasion seems to have arrived. The dynamics have indeed by predicated upon slow creep of institutional integration and I submit that it is this very structure that is at the heart of the apparent inability of these institutions, or the national counterparts to seize the initiative since their very existence in mutuality is predicated upon reacting to one another while attempting to sustain dual and often competing national/pan-European imperatives.

        It took a civil war here in the US to resolve these and related issues, in part, and I observe that there remain many unanswered questions whose dynamic is reflected in our political, economic and most importantly legal life. Looking at Europe’s challenges to surmounting the shortcomings in their current efforts at integration, many of which were shared by the US experience [think of state and local governmental/financial institution defaults and the like that made the US the laughing stock of Europe for some decades] a primary consideration seems to be HOW will Europe chose to surmount these in the face of rolling crisis’s wherein a key contributing factor is the very loss, or severe impairment of the special relationships upon which the structure is predicated from top to bottom. If a major hurdle to federalization of the European continent was and is the lack of willingness of populations and their national institutions to entrust their interests to a pan European federal structure then I must ask how the performance of these federal institutions in safeguarding and enhancing the stability interests of the populations and their institutions expressed primarily through fiscal, monetary, money center and the related issues of balance of trade, FX and the like has fared since inception of the common currency?

        Currently these institutions and those of other global centers of power who are deeply interconnected with Europe are reaching a culmination of circumstances as these various aspects of the rolling crises are now driving events globally. The past few months culminating with the meeting in Poland that is ongoing this Saturday have highlighted all of the moving parts quite admirably. I must take note of the change in tone by the IMF since Christine Lagarde ascended to the chair and the corresponding ripples emanating from various centers of European power. Returning to the initial thrust of my lead post we will now find out if European federalists are really willing to further the cause of greater integration through resolution of the various domestic money center institutions and their societies through nationalization [at the provincial level] or not and exactly what form all this will take.

        Will Europe have the stones to really tell the US to take a hike [by this I mean the fed not Geithner] and resolve the most egregious imbalances to the current structure, or will there be more lip service JCJ style while depending upon levering the balance sheet of the US CB in lieu of their own be it national or federal? Is all this a game of brinkmanship to force national centers of power w/I Europe to concede their power so they do not have to face the tough choices of money center resolution? Or, will the national and federal authorities use this opportunity to address and resolve to the fullest extent possible the fundamental structural deficiencies to the current national/pan-European structure? Of course the decisions the Europeans make for Europe over the next few days and weeks will not be made in isolation. Even if Europe opts for resolution and restructuring does not mean the fed, UK or China/Asia/BRIC’s will simply sit back and not intervene to safeguard their own definition of self-interest. The prospect for more involvement by outside stakeholders so recently derided by European finance ministers meeting in Poland has been the juice that has been a primary catalyst to the policies of extend and pretend to date. E&P that underpins much of policy maker’s willingness to can kick and weaken the nature of special relationship while placating various stakeholders of the current state of affairs within Europe, and globally to date.

        We’ll know much after the conclusion of this week’s FOMC meeting and by action within various market spaces. I will venture that the size and composition of the feds expected next round of easing will be directly attributable to the decisions made in Europe over the next few days. My belief is that the doves on the FOMC want to go HUGE and are willing to intervene even more massively in Europe than has been the case to date to forestall what is viewed as primary threats to international monetary stability emanating from there. Many in Europe while seemingly addicted to this free dope seem cognizant that such policy action only serves to fuel inflation in their economies and ever increasing and unsupportable leverage within their respective national money center institutions and the various asset classes contained on their balance sheets. Collectively a most dynamic set of circumstances making for the most interesting of times.

        1. Richard Kline

          So Miles, in my view the extent of organizational integration required for smooth functioning in the EU/EMU exceeds what is politically doable all in one go, regardless of the crisis, since very little of the public is on board or even aware of this in detail. The EMU has always been an elite project furthermore. Most of the left and the extreme right have their solidarity and best leverage on the local and regional (provincial in your usage) level, and are loathe to let that go for the hazards of a Europe-wide organizing perspective. That’s understandable. Furthermore, the politicos are closely tied to the major banks, and are exceedingly loathe to seize-and-clean those institutions, so there will be no impetus from the politicos to take the lead. These conditions suggest that it will be left to—or more accurately thrust upon—the Euro-crats to do the necesary minimum deeds.

          There are three things at a minimum which must be done in Europe in the near term. Severely indebted sovereigns must be restructured, i.e. interest shaved, term extended, tranches bought up and ‘securitized,’ and in some cases principal written down if not off. Technically that’s a default. The ‘PM of X’ cannot dictate this to the ‘populace of Y,’ so it’s going to have to be a commission or functionary who simply says “Money will not be released for outcome Z but negotiations are underway for a ‘new’ new plan.” Second, there has to be a Eurobond market to fund the center so they have the room to maneuver. But for Country A to issue in Eurobonds, it will have to pass a much stiffer ‘issuer templete,’ which again will be developed in ‘distant control rooms.’ And third, when that restructure blows out some of the banks, they will have to be seized, far more palatable politically and in the European tradition than bailing them out. That will be designated to local regulators, that no ‘assassin of the center’ be seen to transgress ‘local sovereignty’ or whatever.

          Given the present crisis, much of this will be done on the fly without further treaty negotiations, and justified in court if necessary as ‘necessary emergency measures.’ I wouldn’t expect anything looking like an overall, coordinated approach, especially if there _is_ such coordination. Actually firming any of this up into an institutional program could take a dozen years—and likely will, or more, that being the ‘European Way.’ In another comment thread, it was argued that the populace doesn’t trust the bureaucratic center, not least because it is neither democratic nor transparent. To me, the real reform will be making an overt institutional actor to administer this which is relatively transparent, and coherent enough to commande public support. No easy task that, and it will neither come quickly, nor perhaps for several decades given history. But the functions will likely be assumed well before the institutions are framed to officially discharge them. That’s my perspective.

          1. Miles Kendig

            Indeed and thank you. Necessity is the mother of invention and I suspect Europe will find its way clear in shorter order than several more decades.
            Highlights at 11

          2. Mondo

            Richard, thank you. There is a coherent picture of a potential resolution that starts to emerge for me at least.

            A few caveats though that need to be addressed:

            Frankly, I think the ‘faceless Eurocrats’ (your words, in another comment) might overplay their hands if they really were the ones taking the ostensible lead on these actions. There would be winners and losers, and the voters in the losing countries might well press an exit from the Euro or even from the EU in that case. As a minimum, resentment towards those faceless Eurocrats would continue to simmer and might boil over, so they would be setting up the conditions for a future potential breakup for sure.

            Therefore, a Euro-democratic project must be part of the whole package. This could e.g. be a significant strenghtening of the European Parliament vs. the commission and the council. You allude to this in your comment, I would argue that the outline should be presented to the public together with the remainder of the package, to establish a sense of direction and secure public support. The details will take time of course, but a sense of continuous progress will then need to be maintained.

            Some countries btw might not want to be part of such a journey because they don’t want to be part of such a deeper union, so the EU may end up smaller in the future. This is a necessary discussion to be had as well, to be conducted much easier by all sides when a vision of the future is on the table at least in the form of an outline.

            The sensible way forward includes a severe writedown of Greek debt (in whatever form) as you sugges. At the same time, getting ahead of the curve for once would be important for a real resolution. This means a haircut (again, in whatever form) for debt of some other countries. Why wait until after the Spanish elections, when the new government will certainly detect some ‘unexpected’ surprises ? Remember how a very similar situation got the Greek slide starting two years ago.

            Nationalization of banks as you suggest is clearly a sensible option. It is feasible across Europe politically and would allow to continue the extend and pretend game (nobody would lose money except for bank shareholders), but it does present its own challenges: First, weaker countries are in no position to shoulder the burden (Spain, Italy, …), so they would be exposed to further attacks on their sovereign debt, with uncertain outcome to say the least. Second, nationalized banks aren’t necessarily ones that are well run themselves, so they should be sold off after a while.

            During that period where a large part of the banking system would be owned by the sovereigns, there is a unique opportunity however to restructure the banking system to a model that sharply reduces the risks of the current crisis reoccurring anytime soon – nationalization would take out much of the opposition to such a step (except those from across the Atlantic which could and should be disregarded). This could be done in parallel to the necessary restructuring of the EU institutions.

    3. SidFinster

      Coins issued by the Byzantine Empire were accepted as “money” all over Europe and the Arab world, even long after the Byzantine Empire has ceased to exist. (vid. the word “Bezants” as used in Shakespeare and others.)

      Didn’t seem to do much for the peace or stability of Europe or the Arab world. For that matter, the Byzantine Empire died too.

  3. abelenkpe

    I posted this on another site and someone there responded that the Fed is not bailing out anyone. Their reasoning:

    No cost to US
    loans only
    collateral posted

    O and that those who don’t approve of such maneuvering just wanted to see the system crash.

    Sigh.

  4. monday1929

    If the population had any inkling of the panic at the highest levels they would, well, possibly stop shopping for a day or two.
    Can Google Earth see if the lights are on all night at the FED and in Brussels or wherever the Euro perps meet over the next 5-6 days?
    The two day FED meeting could produce a 5-10 trillion dollar coordinated US/Euro initiative. It could buy the Stock Market another six months, which is all Bernanke cares about. If China gets involved, another 6 months time is bought.
    Anything less than that and we see S&P 800 in next 1-8 months.

  5. ArkansasAngie

    A bailout is a bailout is a bailout.

    No way America will stomach another bailout. Throw in the fact that it’s Europe and it’s dead on arrival.

    But … then … the Fed doesn’t have to tell us much of anything.

    So … is their going to be demand created for pitchforks?

    I hear there already is a brisk business in tinfoil hats

    1. marc fleury

      America cannot bail out itself much less the rest of the world. This is china’s play. G was there to reassure everyone on the SWAP lines and TARP imho. That and PR.

  6. Dan

    It will very soon be time for Germany to face its ugly choice. Simple truth: Greece will never repay its debts without its own currency. The Greeks have taken, with their actions, the unstated position: Give us a substantive bailout to cut our debts, or we will follow the Argentina model, and we will do it sooner rather than later.

    So Germany can preserve the EU (and yes, if Greece gets a deal others will expect one), creating moral hazard and big costs for its citizens and banks. Or it can break up the EU and suffer somewhat lesser immediate pain, but lose the EU and all it represents

    This would be a much simpler choice for the German politicians were Germany not so dramatically benefitting by its monetary affiliation with the weaker EU economies. But all good things must come to an end, and it looks to me that this will end in a month, one way or the other.

  7. Nathanael

    “If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse.”

    The longer they delay and muddle through, the more guaranteed it is that austerity will crush the economy. And the more europopulism there will be.

    However, I’m *still* not at all sure that means the euro will collapse. The new europopulism crosses borders. Why wouldn’t there be a concerted popular effort to destroy the ECB in favor of a money-printing straight-to-the-people, private-bank-prosecuting central bank?

    The degree to which there is a *lack* of populism is the degree to which the populist takeover of the euro becomes impossible. So it is the *lack* of populism (in places like Germany) which guarantees the collapse of the euro.

  8. Nathanael

    “I believe that what European officials need to do now is come up with an entirely new structure to achieve integration as the one currently in place has been compromised to such an extent as to make it unworkable.”

    Cede monetary and fiscal policy to the European Parliament, the only EU body with any legitimacy at all.

    And hold fresh elections. If, after fresh elections, Europarl is capable of doing the right thing economically, and of wresting the necessary powers away from the ECB, the Commission, the Council etc., then a viable settlement would exist.

    That is the only possibility.

  9. Jane Doe

    I guess I don’t understand why they don’t get there may be a limited shelf life on bail outs and other approaches.

    Part of it may be that they are using recent history (the post WWII up until 2008) as their guide, but I think that may be a mistake.

  10. craazyman

    I think it will be the bazooka.

    They’ll justify it with a big Kumbaya filled with teary and sentimental high-minded humanism and bonding.

    They’ll point to children, women, babies and they’ll say “We had no choice.” The intellectuals will talk about unity and the rights of all mankind, of one Europe. It will be almost like the Gettsyburg Address with living dead.

    The hard old Germans will crawl away, full of their certainty and their rage. And they’ll have nowhere except their beers and sausages. The young Germans will wonder what the hell is going on with all the old men. All the angry old men.

    It will get so confusing no one will understand anything and the more words that are thrown at it, the more bewildering it will be, until the very concept set breaks and gets redefined completely. Money/Spirit spreads like a weed to a wider consciousness circle and Life goes on, transformed.

  11. growup

    Miles:
    This s just hogwash:

    I believe that what European officials need to do now is come up with an entirely new structure to achieve integration as the one currently in place has been compromised to such an extent as to make it unworkable. There are tremendous opportunities for the countries of Europe both singly and through integration

    The only “opportunities” here are for a undemocratic, unelected mafia of EUrcrats to seize power and create a new aristocracy. It is absurd to imagine that these people can created a “new structure”, one that would gather even more power to themselves, that will not be a disaster for the EU in particular and Western Civilization in general. The arrogance of you leftist that you imagine that things can be fixed by fiddling government “structures”, that you can overturn centuries of political development and replace them with the childish designs of narcissistic, power-grubbing Boomer technocrats is beyond belief. Was not the 20th century full of enough disaster and carnage for you? This will end just as all other attempt to see European-wide power has ended: In blood.

    This just more hogwash:

    Many forget that the Euro project is mostly about creating lasting stability in a region that has been racked by war for most of the past 1000 years.

    Never mind that Europe created the great civilization in history in those 1000 years they were “racked by war”, The EU is in no way responsible for any “peace”, and will most likely lead to a major war. Stability? The very last thing that the EU has brought has been “stability”. This is a risibly preposterous claim. It is one of the greatest destabilizing forces in modern history. It has done what 2 world wars has failed to do: Brought proud European nations and cultures to their knees. Europe is in the pickle it is in today because of the EU.

    The idea that the EU trazis put forward that the EU will “stop war” is wholly without foundation. It s just pure propaganda, propaganda that you have swallowed reflexively. The EU is is just another power grab, this time by International Socialists. When the democratic advances of the states of Europe are swept away, soon enough a despot will find a way to the top. The soft tyranny of the EUocrats will be replaced by the hard tyranny of another Stalin. It s quite probable that that tyrant may in fact be a Russian. The EU is the death of “Europe”; it is not some “advance” or “perfection” of Europe,

    There are really only two outcomes: the tyranny of the EU ushering in a new <i<Acein Regime or a breakup of the EU and a return to sanity, progress and civilization.

    The EU tranzis and their American coreligionists in the Democrat Party desire the former; you should seek the later. These “Socialist Globalists” are a menace to prosperity, liberty and real and actual progress. They and their projects must be cast aside both here and in the EU.

    You need stop drinking the kool-aid and wake up.

    1. Dan Theman

      EU is a power grab by International Socialists. ha ha ha ha!
      How ignorant are you? Please read some books, or newspapers, or go to school or something.

    2. Julius 'n Ethel

      Wow, that makes no sense at all. Could you explain it more, please? I want to load up my vintage Battle-of-Stalingrad-gasmask bong and giggle uncontrollably.

        1. julius n ethel

          Well, I dunno, but Grampa Lavrenti always said a bong of hash really hit the spot when you fixed bayonets and the cadres had their guns at your back.

          1. F. Beard

            I believe the Germans gave their troops meth-amphetamine for battles. I guess US troops had to make due with coffee, cigarettes and adrenaline.

          2. skippy

            Beard, same, same, especially the pacific theater.

            Skippy…how did you think the original hells angels (WWII vets) got their umph from. Although for a time the cops and them got on like a house on fire, hippy control, Vietnam.

            BTW its still in use, see air-force and some un-happy Canadians doing an planed scheduled firing range exercise in the stans. The cunucks came off second best or the methamphetamine usage in air force pilots during combat, doctor prescribe of course. The tubes are your friend, seek, a free-be

            http://www.rense.com/general25/sof.htm

  12. Sally Gee

    I suspect that most EU member states have already sussed that what should have happened after Bear Stearns and need to happen now and will allow things take their course.

    After all, saving the banks and the bondholders yet again at the expense of all the real economies in the real world lacks a great deal in purposefulness in anything over the very short term and no obvious political advantage over the medium and long terms. This is he time to let it all go and follow nature’s way, compelling haircuts down to the brain tissue – and even further if need be.

    Time for the Euros, Americanos and the Brits to take the problems thrice created by their overmighty financial sectors a little more soberly and ready the cells for the chancers and crooks who just want to keep on playing musical chairs with the world’s monetary systems and when the music stops expect the taxpayers bail them out yet again.

    Of coure, the immediate consequences will be embarrassing for the governments concerned but nonetheless the adverse effects will be shortlasting. The financial sectors motley plague of bums, stiffs and deadlegs can pay the price of sorting out their own mess by serving say, 50-100 years hard time to make the rest of us feel good about the pain they’ve caused.

    The more grown up governments can take responsibility for all retail deposits below, say $100,000, and most, if not all, non-securitized retail assets, and operate a utility banking service to start the real economy moving by buying up securitised assets at firesale prices and take the opportunity to provide good mortgages for re-valued properties both for householders whose mortgages have been securitised and for people who just need homes. A government utility bank will have the means provide sufficient working capital to businesses with a real economic purpose to enable them to survive and grow during the double dip.

  13. Bernard

    just amazes me how this “day of reckoning” get delayed over and over again. the depth of the counter measures to keep the Euro/austerity “mindset” alive.

    i guess it really is a “zombie.” it should have died so many times before, and yet it still oozes and spread death and destruction. Rising from the grave.

    Gosh, like the Silver spike needed to kill the Vampire. on and on and on.

    watching capitalists steals the metal doorknobs and electrical wires from housess, just to keep feeding the Monsters.

    this will turn out so very ugly when this collapses. and the silence will be deafening.

  14. SteveA

    Several articles in the French MSM mention the Fed’s participation.

    The take in the European press is that Geithner’s views were roundly and even impolitely rejected. It was also mentioned that he left the ministerial meeting to address a group of bankers privately.

  15. Knut

    I’m just starting to read Otmar Issing’s The Birth of the Euro. A celebretaory enconium by one of its architechts publishedin 2008. Should be good reading. Nothing like hindsight to see the flaws. In 1993 I opposed it, and I recall spending the good part of an evening with Ted Truman drinking in a bar at Place St. Michel in Paris agreeing with him that it would never work. Too soon, too fast. Time flies when you’re having fun.

  16. avgJohn

    What about the credit default swap insurance that American (“so-called”) banks have sold, insuring European countries and bank’s debt? Couldn’t these trillions of dollars of derivatives bring down the entire global financial system? Admittedly, I’m ignorant of the amount of risk exposure American banks have assumed and would be responsible for in the event we have major collapses in the government and corporate bond markets in Europe. Of course, ultimately it would all be backstopped by the taxpayer anyway.

    Maybe the fed feels it needs to protect the banks, insurers and tax payers on this side of the Atlantic?

    I’m not saying I agree with it, just wondering why the treasury and fed are so deeply involved.

  17. EB

    If we have another ridiculous bail out I think Bernanke should start preparing for living his twilight years in prison. If he prints as much money as is needed to prop up the market to the current levels he will invite enough scorn and ridicule and anger to end up a criminal. He has already admitted QEII failed. So he will invite more inflation and more pain on working (and non-working) Americans with another version? He will end up getting lynched. He cannot defend his corrupt dealings with the banks as it stands now. He cannot defend bailing out incompetence. Res ipsa loquitur. He has blatantly flaunted our laws and ripped off the American public and too many people are watching. Bernanke has no clothes and everyone knows it.

    I am short this weekend. Not sure if it will work out but I am short. (I don’t play for high stakes anyways.)

  18. Maximilien

    Our (self-denoted) leaders can stay irrational longer than we can remain solvent. And they fully intend to do so.

  19. Typing Omnkey (ha ha)

    European politicians are paralysed and are only doing enough to push off the day of reckoning.

    I believe that the most urgent priority was to push the day beyond quadruple witching. Everything else could wait.

    If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen.

    I say that QE3 is not going to happen either unless Congress mandates it or an Executive Order is signed and made public. Contrary to the general views regularly expressed on this board, the Fed does have to pay attention to public opinion, and has no interest in becoming a pinata for the next fourteen months of campaigning.

    And that goes back to what Europe will try to do–probably nothing until thew German and French elections are over. Since things will get ugly well before then, I suspect that it will dawn on those Heads of State (including Obama) that they are not going to get re-elected. How they act after that is anybody’s guess…

    I would look at the TED and Euribo-OIS spreads for early warning indicators (again, I’m not a trader–this is based on my limited understanding of markets)

    Just as one last comment in a very rambling post, I am astonished that nobody is looking at Britain at the moment. From what I can tell, their position is not much better than the rest of Europe.

  20. Typing Omnkey (ha ha)

    In the interim that means bailouts, not just for sovereigns but for banks as well.

    Bailouts for who? Bailouts from whom? There’s not enough money for these bailouts (at least not to permanently solve this situation). East Germany cost its western counterpart almost 2tr Euros. What is it going to cost to rebuild all of Europe?? is At best, there’s enough money for some smoke and mirrors, and even that won’t last long.

    Maybe you can ask the Asians to throw some money this way, but why would they? They can see the inevitable results just as well as everybody else. And we can’t really appeal to them as a quid pro quo for all the help we gave them in the late 90s…

    I’m becoming to increasingly consider he possibility that the IMF will be forced to sell some more of its $150bn its gold holdings and join the sovereigns in going belly up shortly thereafter…

  21. Robert Callaghan

    an economist is a person who is good with numbers but doesn’t have enough personality to be an accountant.

    economists know there are three type of people in the world, those who can count and those who can’t.

    Yves Smith is a super hot babe.

  22. Patrick

    I try never to forget this. There’s no need to complicate matters. The Fed IS the lender of last resort. US laws/feelings/politics have no meaningful restraints. When the time comes everything is stagecraft. The Fed is Europe’s real central bank and has always been. Half the money in the 2008 bailouts went to European Banks. When and if Greece defaults people will yawn behind closed doors. If necessary the Fed will recap every bank in Europe. If it is against any bylaws, they will change them. The Fed and its proxies will bail out every single country if warranted. This is an all in game, keystrokes on a computer. Everything else is political posturing. Ultimately the game is time and preventing civil unrest/panics.

    Where it leads is the trillion dollar question. What I am certain about, we are going to find out.

  23. Jim Elliot

    Please keep the intelligent commentary to a minimum. It the American people get it they might get pissed off and do something like take their money out of the banks and put it back under their bed where it would be safer.

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