German Bund Action Goes Badly; Bank of America CDS Spread Hit New High; EuroSovereign and US Bank Spreads Widen More. Will the Germans Finally Break Glass?

As our overly-long headline tells you, Wednesday was a really bad day in credit land. Not only has the reality of the severity and seeming intractability of the Eurozone mess started sinking in, but US investors seem finally to be facing up to the fact that a full blown crisis would not be contained and will engulf American banks. If you thought September-October 2008 events were nasty, they could look like a mere trial run for what may be in the offing.

The Financial Times coverage on the failure of the Bund auction is suitably grim:

The worst-received bond sale by Germany since the launch of the euro fuelled market fears that the continent’s debt crisis was now affecting Berlin…

The bond auction only managed to raise two-thirds of the amount targeted..

The euro, which has held up relatively well despite the turmoil in the bond markets, suffered one of its biggest one-day falls against the dollar this year, while eurozone government debt was sold off across the board…

But as fear spread across trading floors, Germany started to trade like a risk asset with Bund yields, which have an inverse relationship with prices, rising roughly in line with French, Italian, Spanish and Belgian yields. However yields on short-term German debt went into negative territory, meaning that investors effectively are paying to hold the bills because they see Berlin as a safe haven..

A senior trader at a US bank said: “We are now seeing funds and clients wanting to get out of anything that is denominated in euros and that includes Bunds because they don’t know what will happen to monetary union. It is not helped by the year-end with most banks not prepared to buy anything.”..

The so-called failure also comes against a trend of poor auctions. It was the ninth auction that failed to meet its target this year, according to the German debt agency. However, demand was significantly weaker this time round.

It is true, as the quote alludes, that liquidity and trading volumes fall at year end. But this is a little early to see that pattern playing a big role. It may also be true that the very low yield on this particular auction was a deterrent to buyers. But even if there are logical explanations as to why this bad auction means less than it seems, appearances of weakness have a nasty way of becoming reality.

And on the US banks:

Investors paid record amounts to protect themselves against the risk of default by Bank of America on Wednesday…

“There is again broad risk-averse sentiment stemming from Europe,” said Otis Casey, an analyst at Markit. “We still don’t have a solution there.”…

CDS protection on European financials also rose to fresh highs on Wednesday..
Italian banks were among the hardest hit, with CDS levels reaching “stratospheric” levels, according to Markit’s Mr Casey. Protection on UniCredit, Italy’s biggest lender, rose 43bp to 622bp, a fresh record. CDS on Intesa Sanpaolo rose 57bp to 580bp, while CDS on Banco Popolare jumped 63bp to 925bp..

Signs of broader stress across US financials have also been flagged by three-month dollar Libor, the interbank lending rate, rising to its highest setting since July 2010. The benchmark reference rate for banks lending to each other rose to 0.50611 per cent on Wednesday, double this year’s low of 0.2450 per cent set in June.

Another barometer of bank counterparty risk, two-year interest rate swap spreads rose to their highest level this week since May 2010. Swaps reflect the credit quality of banks that trade the derivative and widen over Treasury yields during periods of banking stress.

To make a bad situation worse, the banks are in precisely the same mess they were in in late 2008: under credit market pressure, with stock prices too low to make equity issuance an attractive way out. For a garbage barge to sell a lot of equity in a risk-off market is a tall order. Yet no one is pillorying bank managements or regulators for getting their balance sheets in better shape in 2009 or 2010. The banks continued their overly generous pay practices, failed to retain enough earnings, and couldn’t be bothered to sell more stock.

The most troubling sign of the day, however, is that the officialdom seems unwilling to take the steps needed to keep the looming crisis from spinning out of control. As we’ve indicated, the minimum needed measure is for the ECB to signal that it is willing to intervene aggressively. That is not a sufficient as a solution; the underlying problem, that of internal imbalances (meaning Germany’s addiction to running big trade surpluses) needs to be dealt with. But you don’t tell a patient in the throes of a heart attack to lose weight and start jogging. You stabilize him first, and then when he has recuperated enough, start addressing the underlying pathology. Of course, what we did in the US was keep the patient receiving costly hospital care, and allowed him to order in gourmet meals, so he is now 50 pounds heavier.

Despite the continuing refusal by the Bundesbank and Chancellor Angela Merkel to consider eurobonds or other measures that would have the ECB de facto act in a fiscal capacity by monetizing debt, quite a few members of the NC commentariat continue to argue that the Eurocrats will come around in a crisis, just as the US did. I would not be so optimistic.

First, even though I deplore many of the actions taken in the US during the crisis, and the fact that this disaster was permitted to happen in the first place, you do have to give Paulson, Bernanke and Geithner credit for going into crisis mode. I don’t see the European leadership as willing or able to spend weeks in marathon sessions to cobble emergency responses together (which could just as well be nationalizations rather than rescues). They still seem to be in very deep denial that the situation is decaying as rapidly as it is, and decisive intervention is needed. And do not forget we have deep cultural biases at work. If you try telling a German that having the ECB print is actually a pretty decent idea, particularly given the risk of deflation in Europe, they react as if you’ve recommended deliberately contracting HIV as a cure for cancer.

Second, and related, is that even if the Eurocrats do wake up and become more unified in their responses, they may be too late. Market timetables are faster than political ones.

Third is that the complexity of the Eurozone mess is greater than the situation in the US during the crisis. As we noted in our post yesterday:

There are a ton more moving parts than in the US in 2008: more institutions at risk, multiple domestic banking regulators and national legislatures, Maastrict treaty rules. Anyone who has worked with networks knows that more nodes and more communication lines between those nodes means more points of failure. The odds of things ending up badly if the markets go critical are far greater than the last time around, and that’s before we factor in the caliber of Eurozone emergency responses thus far.

As I too often say, it would be better if I were wrong. While it is probably too early to tell whether the dismal results of the Bund auction have served as a wake-up call to Germany’s leadership, if we don’t see a shift in posture very soon, with sovereign and bank bond yields continuing to escalate, the Eurozone may well pass beyond the event horizon. And the worst is that everything evidently continues to seem normal even as you go pat the point of no redemptinn.

Print Friendly, PDF & Email


  1. toxymoron

    “Investors paid record amounts to protect themselves”

    I have been reading too much NC, but I have to ask, who are those investors paying for that protection, and why do they believe they will get that protection?

    1. Yves Smith Post author

      Hah, yes, that is a VERY good question, given that bank and sovereign CDS are a classic “wrong way trade,” meaning if the events you are betting on via the trade come to pass, it’s pretty certain the counterparty won’t perform.

        1. tyaresun

          It is a fact. My dad got denied twice. First time for pneumonia and second time for a broken shoulder. The reason given both times was “pre-existing condition”. He had Parkinson’s disease.

      1. Gallam

        There are many complicated and potentially disastrous resolutions to the problems of the Euro.

        The simple solution, in the case of e.g. Italy, is a one-off hypothecated wealth tax in serious size that is used to buy back its bonds. They have even done something similar to this before.

        It would be more difficult to implement such a tax in countries with huge private sector debts (Spain), but it is much simpler than any of the other proposals (except printing, which seems to be ruled out).

        Which means, I think, that it is coming.

    2. Francois T

      “Investors paid record amounts to protect themselves”

      Any of these “investors” ever heard the term, “Sell”?

  2. b

    This “failure” of the bund sales seems to be engineered to put pressure on Merkel. Why is this emphasized so much in today’s news when it is the ninth time already?

    It will not work. The ECB going into a fiscal role is against current treaties. Treaties can be changed but Germany will demand a price for that that others will not be willing to pay.

    1. jake chase

      It is interesting that Germany continues its preoccupation with Wiemar inflation when the real danger is deflationary collapse. Although we seem to have idiots in charge of every Euro institution, the size and severity of the impending disaster should ultimately be enough to produce a kick the can solution. Those betting this will not happen are likely to be severely shorn. Focus on the mechanical difficulties betrays the customary semantic stupidity. Has everyone forgotten those “voluntary” Greek bond refinancings? It hasn’t even been a month since the monetary authorities engineered that one. When will traders realize that CDS premiums on soverign debt is money pissed away? How ridiculous that when a problem can be solved simply by moving electrons across computer screens, nobody in charge can be persuaded to do it until all financial markets tank. Those of us holding stocks need real courage to hold on. Or we could just turn off the idiocy and propaganda which passes for news.

      1. chogra

        You still hold stocks?

        Germany is in big trouble. Germany’s economy is already at stall speed, heading into recession. Any real solution to Euro crisis means addressing the trade imbalances in the Euro zone, which would send Germany’s export-driven economy into a tailspin. Moreover, any real solution will probably involve some sort of a transfer of wealth from Germany back to the weaker members (much as states like California transfer wealth via taxes to states like Mississippi). There are big, maybe unsurmountable, psychological hurdles to the Germans’ doing that. They went to a lot of trouble to extract that wealth in the firt place; they’re going to be loath to give it back.

        Unless Germany consents to some sort of a transfer, the Germans are going to lose a lot of sales to the rest of the EMU, no matter how things play out. It could be they are trying to counter that by upping sales to the rest of the world, but to do that they need the Euro to get a lot weaker. Because of this, they might not be entirely unhappy at the way things have gone so far. On the other hand, if Bunds start to deteriorate, that could change in a hurry.

        1. Jim

          Isn’t that what the GOP in this country argues – that unless the US voter consents to significant entitlement cuts the entire nation will implode? That Medicare needs to be converted into a defined contribution program so as “to save it”.

          Yet, the same NC commentariat which takes the GOP to task for subverting the will of the American voter (who does not want any cuts to his entitlement) castigates the German voter for insisting on no Eurobonds or transfer union.

          Apparently, democracy is fine in the US, but for some reason, some of you believe that the German voter does not realize what he really wants.

          1. Seattle Andrew

            The difference between Germany and the U.S. is the difference between the U.S. and California. Germany can’t manage its own monetary policy and through the Euro is tied to its weakest neighbors. If it is unwilling to transfer some of its wealth to those neighbors its Euro-ties will pull it down after them. California, thankfully perhaps, doesn’t have the choice. When the Euro zone was created Germany and the U.S. became apples and oranges.

          2. Jesse

            Just curious, Jim, if you recognize the very real possibility that Euro won’t exist 5 years from now? You used the example of medicare, but I think the better comparison would be people who are global warming deniers, since you seem to think the Euro is on a sustainable course.

          3. Heron

            The one is nothing like the other. It what way would such transfers reduce the quality of life of German citizens? Why would such transfers force austerity on the German government (not that it needs austerity forced on it; they’re its biggest fans!)? Are you seriously arguing that there is some material negative that the citizens of net contributor states like NY, California and, until recently, Texas have been eating for decades so that Mississippi can have roads and keep the River in its banks? Their populations are larger, their economies more robust, and therefore their revenue contributions are higher; where in this are they being shafted?

            The loss of Medicare and social security is a direct attack on standard of living, and having a Lender of Last Resort for a currency to be effective has been recognized SOP since Adam Smith’s day. You haven’t made a compelling argument here; all you’ve done is take A, put it next to B and say “see, there’s A and B. They’re the Same!” Well they aren’t, and you saying it doesn’t make them so.

        2. jake chase

          No sensible observer contemplates a “real” solution to any financial problem. The question is what kind of accounting adjustments must be made by creditors to keep the debtor nations afloat, so that the game of buying and selling can continue and most of the world’s “civilized” people can experience food coming in and trash going out, rather than riots and bread lines, wars and revolutions.

  3. SidFinster

    I suspect that the increasingl likelihood of an ECB print-a-thon is in fact one of the things that is driving Bund yields upwards.

    The other is the threat of Germany going on the hook for its Euroneighbors, i.e. Eurobonds.

    In the first case, buyers of Bunds get paid, but in a debased currency. In the second case, Germany is a much bigger credit risk than it was a few days ago.

  4. YankeeFrank

    I wonder why there is such a strong preservationist instinct among the essayists I read here on NC. From Yves to Auerbach to Mosler and on, the first thing you want is for the ECB to start buying up all the bonds and to guarantee the system doesn’t collapse. I wonder though, do any of you think that once this is done, there will be true reform? By encouraging more bailouts are we not just providing cover and protection for a criminal class of bankers and “technocrats” that place debt service above human rights and democracy? Won’t it do just what has been done in the US? Allowing these criminals to cement their power over our societies is not in our interests, yet that is what we’ve done. What promise is there that if the Europeans go down the same road that they will, once the “patient is stabilized”, engage in the necessary reforms? To me it seems that a collapse is the only thing that will give us a chance to break the stranglehold of finance on the western world, by finally and totally discrediting them and showing them for the dangerous criminals they are. Politicians that provide cover for these oligarchs will then be seen for what they are, and will have to change their tune or be booted from power. Obviously it would be better if the system could be preserved in some form while making the necessary reforms. But given that preservation will most likely negate any chance of reform the only other option is total collapse. If there is something wrong with my thinking I’d love to hear it…

    1. wbgonne

      I agree with you. And I’d also love to hear the counterargument. Another bailout will be just that: another bailout. The money will be consumed and the problems will grow as TBTF becomes ever more entrenched. I hope Germany sticks to its position. They may be doing it for the wrong reasons but the outcome is the necessary one: the Global Financial System must be allowed to fail. Only then can we construct one that works for the 99% instead of the 1%. We should be preparing for and proposing a post-apocalyptic Global Financial System instead of trying desperately (and futilely) to prop up the rotten one which has delivered us to this sorry pass.

      1. Dave of Maryland

        In Germany’s favor, they have seen the very worst that can happen: Cities firebombed, the nation invaded and occupied, themselves blamed for two wars back-to-back. What’s a little loss of money compared to the post WWII clean-up and reconstruction?

          1. LeonovaBalletRusse

            YVES, alert! most important link today.
            Thank you, lloyd blankstein, this is *crucial* information.
            We should devour “THE [A] BUBBLE THAT BROKE THE WORLD” by Garet Garrett (Boston, Little Brown and Company, 1932), this night.

            This is the *good* gift of technology, well employed.

        1. LeonovaBalletRusse

          NB blankstein link
          Urgent, required reading ON POINT. Free pdf download.

          Again, thank you, lloyd blankstein, for the link to pdf of full text of “THE [A] BUBBLE THAT BROKE THE WORLD” by Garet Garrett, June 1932! – Little, Brown and Company of Boston.

          YVES, use Chinese toothpicks if you must, it’s that timely, and that good.

      2. LeonovaBalletRusse

        “Yves to Auerbach to Mosler…” The tenor of this comment and the comment that follows it has the ring of trollspeak.

        1. RA

          The reason is likely the heart attack scenario referenced. By allowing a full liquidation of the U.S. and Europe, you will have nothing left to worry about once you let natural evolution take its course. 95% of all species that ever existed are now extinct. That is how things tend to play out without intervention.

        2. Christophe

          No, it doesn’t. Both of these posters have offered up nuanced arguments on many occasions (including this one,) often in line with our benevolent overlord, Yves, but occasionally diametrically opposed. That inconsistency and originality are signs of a real, thinking person, not a troll.

          The tool of publicly outing trolls is, like most tools, only as useful as our ability to wield it wisely. If it becomes the default reaction toward any poster whose ideas we do not like, not only do we dull its edge rendering it useless when really necessary, but we become a bitter, unenlightened community with nothing to offer but rhetorical attacks and logical fallacies. In this case, attacking the man rather than the idea. If you disagree with their posts, please make an counterargument, not a defamation.

          1. LeonovaBalletRusse

            That’s a fine, shallow insult, Christophe. You think a contrarian view rates *troll* status in my book? Nothing could be farther from the truth. It’s the *tone* that gives trolls away, and the dead repition of memes, just bordering on propaganda I’ve seen in every dimension. Thus, I did NOT call them trolls, but said that the *tenor* of their arguments had the *ring* of trollspeak, rather than the ring of truth. Three decades in “Marketing: strategic positioning* make me alert to nuances you may miss.

        3. YankeeFrank

          Really? Well then I guess I’ve been “trolling” this website for the past 3 years then, agreeing with pretty much everything presented. One of the only times I have a real disagreement with the position taken by the posters and I’m a troll? Can we not have enlightened conversations where we don’t always agree without throwing around silly accusations? Please don’t throw crap when someone makes a point or asks a genuine question that might disagree with the post. You’re new here so I’ll chalk it up to that.

    2. tom allen

      Yeah, foolish question here, but isn’t there some sort of “Ding Dong the Witch is Dead” scenario, if only in our dreams, wherein the collapse of the rentier hierarchy allows us Winkies to go back (or forward, or whatever) to a mixed socialist-capitalist New Deal economy? You know, after an impromptu musical number? :-)

      1. YankeeFrank

        Ha ha. Funny. So you don’t think that collapsed banks will have less lobbying power over government than fully-funded banks with gobs of taxpayer money to lobby with? No one is saying anything is a fait accompli, but I’m seriously asking which way we have a better chance. Do you have an actual opinion or just more snark?

      1. Dan G

        …and what is the drift; that everyone knolwedgeable in economics knows that printing money will work better than not printing money?! How does one like their torture-slow waterboard like until death, or quick, painful and done with.

        1. LeonovaBalletRusse

          Dan G, thoughtful *feedback* is part of the grand work-out. No, we’re not there yet; and it will not be “business as usual.” 19th century strategy don’t cut it in C 21.

      2. Christophe

        Please see above about the pitfalls of attacking (or shaming) the man rather than the idea. “Thoughtful feedback” is indeed exactly what is needed.

          1. Christophe

            You were right above – your dead repetition of memes is indeed just propaganda. You are doing more damage to civil discourse here than any troll could hope to. Please practice your “Marketing: strategic positioning” somewhere else.

      3. YankeeFrank

        I don’t know what that means. I’ll take your answer as “I don’t know Yankee, perhaps you are correct”.

    3. Ray Phenicie

      “I wonder though, do any of you think that once this is done, there will be true reform?”
      That is indeed the $64 trillion question.
      The Occupy movement is a step in the right direction as was the Move your Money day. Along with those an outright rebellion on the part of homeowners, credit card holders and anyone who has debt assigned to them-give it up! Stop paying! If the car or the home gets repossessed, that is the price to pay for rebellion. Until the peonage shoves back a bit, nothing will really change and we will be here on NC commenting our little debt paying hearts away.

      Frederick Douglas said it best:
      “Let me give you a word of the philosophy of reform. The whole history of the progress of human liberty shows that all concessions yet made to her august claims, have been born of earnest struggle. The conflict has been exciting, agitating, all-absorbing, and for the time being, putting all other tumults to silence. It must do this or it does nothing. If there is no struggle there is no progress. Those who profess to favor freedom and yet depreciate agitation, are men who want crops without plowing up the ground, they want rain without thunder and lightening. They want the ocean without the awful roar of its many waters.”

      “This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress. In the light of these ideas, Negroes will be hunted at the North, and held and flogged at the South so long as they submit to those devilish outrages, and make no resistance, either moral or physical. Men may not get all they pay for in this world; but they must certainly pay for all they get. If we ever get free from the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others. ” Frederick Douglass, 1857

      Repeat this again and again

      Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress.

      1. Dan G

        Exactly. Why give the drug addict more alcohol or crack to enable the same behaviour again and again. Insanity!

        1. LeonovaBalletRusse

          It’s C 21. We are questioning the value to society of the *neuronal circuitry* of banksters as we know them now. It’s the Old Guard’s prepared *crimenogenic environment* (v. William K. Black) that must go.

          Insights of Gabor Mate, M.D. are invaluable right now, since “We have met the enemy and it is us.”

    4. Barbyrah

      Stated with great respect for the people with a background in finance:

      1. If one’s life has been directed to live in such a world, focus in such a world, engage in such a world, my guess is, it’s difficult to shift from “Gotta save this sucker no matter what” to “This whole corrupt cesspool needs to completely collapse for the well-being of the planet”… Simply: If your training has been to do whatever it takes to “make it work,” any suggestion to the contrary…runs counter to what your whole life has been about (at least up to this point).
      2. Additionally, this type of total collapse is a frightening thought to many with such a background because of deep, long-term enmeshed with the Old System.
      3. I am appreciative of your insight, and agree with every word you posted.
      4. As I’ve noted in previous posts of my own, there are alternative “systems” being explored by many on the planet right now (websites are being constructed and expanded constantly), including some that do not even use money.
      5. Granted, introducing completely “new” ways of relating to each other as well as to the environment and even other species via an emphasis on such things as true equality, respectful cooperation, and sustainable living will take an inner “shift” and change in human consciousness. But I do see the beginnings of such a shift. The beginnings.

      Thanks for putting yourself out there with this one, YankeeFrank.

      1. Seattle Andrew

        Barbyrah, I agree that those who’ve spent their lives immersed in finance have trouble seeing the alternatives. But the basic problem is scale. Without a total collapse – like Yankee Frank advocates – and years of horror nothing new will come. To Frederick Douglass’s point, it took an unbelievably bloody Civil War to get rid of slavery; the idea that it will take anything less to get entirely rid of financial oligarchy strikes me as a-historic. The fact is that incremental reform, a better version of the world we’ve already got, is a better alternative. The question is whether it is possible. I think most of the commenters here (and Yves) are committed to it. Here’s hoping! In the mean time, we’d better be looking at those alternatives you talk about, trying them out, sorting through history, and looking for ways to scale a better future. If there isn’t a good alternative after the next collapse, you can bet we’ll have to settle for a more horrific one.

        1. LeonovaBalletRusse

          History shows we cannot get rid of oligarchy, but we can get rid of the oligarchy’s absolute control over government re-created as their private fiefdom. Up to now, at least.

        2. YankeeFrank

          I wasn’t exactly advocating total collapse — just refusing the bail out the miscreants who have screwed Europe and the US so badly. I’m not suggesting we let the entire banking apparatus fall apart.

    5. Dave of Maryland

      The underlying problem isn’t finance at all.

      It’s contract. It’s nasty, manipulative contracts that are killing the world, and the insistence that such contracts, with dubious coerced signatures on them, are valid and must be enforced, even if the world as a whole perishes.

      Sack the bankers and you still have the underlying contract problem. So whatever “solution” you may get will be only temporary. There will always be another contract, another sucker deal.

      1. LeonovaBalletRusse

        Dave, the contracts are written in DNA. “Blood and soil, military and/or financial Lebensraum” – you know, *entitlement*.

    6. scraping_by

      I don’t think the choice here is between advocating monetizing debt because everything’s peachy or advocating monetizing debt because the Euro is the last best hope of mankind. There’s also the observer stance watching the wheels fall off of the Euro-based money project.

      The final collapse will have a lot of details along the way, a bit falls off here, a wheel falls off there, the clang of sheet metal as part of the body hit the pavement. While boosters of the ECB are engaged, necessarily, in deception and denial, it’s looking at the truth to note we’re watching the system falling down.

      I’m interested in whether this furthers or hinders the imperialism by debt we’re watching, whether losing credibility with private lenders makes it more or less likely for another nation to come under an ECB puppet government. Since the takeover depends on a lot of bluff and bluster, it will probably be spun to the need for more ECB functionaries supplanting more popularly elected governments.

      On this side of the pond, we need to be on our guard. While the Amero is presently “conspiracy theory” it’s a stupid idea which would benefit a small group of insiders. Which would make it the sort of thing that might just happen.

    7. Jim

      Well said.

      The NC commentariat champions the OWS movement while simultaneously encouraging actions in the EuroZone which OWS opposed in the US.

      Cognitive Dissonance.

      1. LeonovaBalletRusse

        Jim, you are the voice of dissent against the mixed voices of the NC commentariat? Do you come with an open mind?

      2. scraping_by

        I suppose that’s because we’re all refugees from ACORN.

        It’s an inaccurate accusation. I also think it’s a known right-wing noise technique to make accusation distorting someone’s position and never listen to subsequent corrections.

        In any case, it’s unprovable since there are no accumulator surveys on this site. Indeed, go ahead and do word frequency analysis on the posts and see if your accusation has any basis. Just publish the raw data so we can check it up.

    8. RBHoughton

      Spot on.

      The FT article had a comment comparing the German bond sale and its 60% take-up with the concurrent US Treasury sale of 7-year bonds and its 30% take-up.

      Funny thing that.

  5. Fiver

    I favor some version of the outline put forward by Michael Pettis as against the views of Ambrose Evans-Pritchard presented in this analysis by Mike Shecklock. The idea that it’s “Print of Perish” serves some interests very well. Unfortunately, not the interests of the peoples involved. I think a German departure, creation of a new, smaller “core” while keeping the Euro for the weaker group as the least damaging approach has real merit. After all, we cannot just pretend that tens of trillions of dollars of economic “activity” have been almost completely wasted in the last decade all over the globe – we were all hosed by the Corruptocracy. With Germany leading the exit, the “new DM” or whatever will not appreciate nearly so sharply, nor the Euro suffer so bad a fall. I think now everyone understands the seriousness, and its down to lookin at the real choices, not just the false either/or being serially rammed down everyone’s throat. The bill for trying to salvage the whole EZ via fiscal/political union and unlimited ECB interventions gets bigger every day.

    Here’s the original Pettis piece:

    And its incorporation into Shedlocks’s take on the AEP non-solution:

    Here’s a question? How much is it worth to the US to control the world’s reserve currency? A broken Euro gives Bernanke a lot more room to print if he wants to, no?

    1. LeonovaBalletRusse

      Fiver, your last paragraph strikes the center of the bullseye now, but ultimately it doesn’t matter if it’s called the *dollarUS*. Control of TopDog currency is all, in whatever universal *bits* seem appropriate du jour.

      This is the ground supporting the arguments for IMF “global currency” in credits, and for Mansoor Khan’s “government owned bank” in which all of America’s non-commercial *deposits* would be held digitally *in reserve*. – links to Mansoor H. Khan’s article dated September 7, 2009.

      Isn’t this related to the *bit coin* experiment, and to *virtual currency becomes real currency* experiments in such games as Farmville?

    2. mansoor h. khan


      Bit-coin and other digital currency solutions are “no solutions” because the main point of modern money (currency system) is that money is really a bookkeeping entry in a ledger. Since this is the case a trusted “ledger keeper” needed. Who should be the ledger keeper?

      That is like asking Who should manage our military? (Private individuals or elected government representatives). I think it is obvious that a government should be the “ledger keeper”.


      1. LeonovaBalletRusse

        mansoor h. khan – I agree. *Bit-coin* and the like were/are *experiments* run up the flagpole, to see who would salute, they are NOT solutions. Aren’t these *work-outs* by dissenters against the Fed, mostly?

        Did you think I was comparing your argument with *bit-coin* and *Farmville* experiments? Please, try to understand, I appreciate your work set forth in 2009, and hope you will revise and expand it, or position it, within the 2011 frame.

        1. mansoor h. khan


          To get a full picture of my proposals please read all articles on my blogsite (

          Of course, like you I have been learning since the Lehman collapse and thank god I have a much better understanding of our economic situation. And I am pleasantly surprised because most of our problem is a bookkeeping problem not a “not enough real wealth problem”.


  6. disgruntled observer


    I’ve been thinking about this: Is not a monetary union with diverging sovereign bond yields an absurdity? Would it not imply that a. the spread between prices is in fact a bubble that is in the process of bursting, and b. they’ve lost control of the policy rate?

    Is it possible as suggested by FT alphaville that: “It is the Bundesbank which may be cornering the bund market on purpose. And it’s doing so to ensure that the one last repo rate in Europe that can be controlled remains suppressed.

    The rate is important because almost all interbank funding is now done on a secured basis against the best quality collateral. This implies two important points: 1) that the ECB itself has lost control and depends almost entirely on the Bundesbank to enforce its low rate policy target and 2) that the Bundesbank is having to retain more bunds from the market than ever before just to ensure the last functioning repo rate in Europe doesn’t spiral out of control.”

  7. Lafayette

    Will the Germans Finally Break Glass?

    Let’s hope so. A BadBank is and has been (since at least the Japanese BadDebt crisis) the only solution.

    It would also help if the proposition to create a European Credit Rating Agency (accredited by the EU Commission in Brussels) could also move further forward.

    This development mean the EU would then have its hands on the you-know-whats of a CRA … just like, I submit, the US government does as well.

    The methods by which the CRA’s “review” a nation’s credit-worthiness is by no means as objective as we may think. A lot is given to interpretation, which is highly debatable.

    And given that the American CRA’s committed, I submit, provable negligence (and perhaps fraud) in allocating Triple-A ratings to SubPrime Toxic Waste is indicative of how large is that interpretation of credit-worthiness.

    These US-based agencies have lost most of the professional credibility that they may have built over the years. At least as regards sovereign debt. (Perhaps they are better at corporate debt analyses?)

    1. F. Beard

      the only solution. Lafayette

      Wrong. A universal bailout, including to German savers, would fix everyone from the bottom up including the banks.

      The problem is mostly too much debt relative to the amount and velocity of money in circulation.

      1. wunsacon

        So agree…

        Are we the only people recommending a South-Park-esque solution of sending every citizen a check every month (regardless of individual need) until deflation risks are licked?

        1. LeonovaBalletRusse

          Or free credit on plastic. Keeps the peace. Why not?

          Isn’t it called “muddling through?”

          1. LeonovaBalletRusse

            F. Beard, thanks for the link. Here’s another:


            “South Park vs. Cafe del Mar – And It’s Gone (Johannes Dahlberg Financial Crisis Mash)”

            Dancing to the D.J’s complex beat helps to get rid of the Thanksgiving feast. I wonder what Ballanchine might have done with this; or better yet, Leonide Massine.

    2. mansoor h. khan


      Another solution. Let the bankers spend (not lend) money into the economy metered only by the amount of credit money (currency) destroyed. Let them live like kings.

      At least this way we won’t have to suffer through a depression just to keep the banking cartel in power. Maybe we can let them do that for two generations and then take their money creation/currency issuance power away (a treaty with the cartel, surely they must know that the end is near and may accept this compromise).


      1. LeonovaBalletRusse

        mansoor h. khan, your two-tier solution still sounds plausible. Let the 1% play together in a gated sandbox, while *the rest* get on with our living, working, exchanging. Sounds like OUR *reality* can indeed be separate from theirs. We can move forward together, discard the “American Dream” of *rags to 1% in one generation*, which cannot be accomplished without joining the 1% in fraud and other crimes they like to commit through agents.

        Let us, *the rest*, just cut them loose (recall “2011”).

        Let’s take advantage of the *quantum complex* we live in. Why be *simple-minded*, so Old School. See: Brian Greene, “THE HIDDEN REALITY: Parallel Universes and the Deep Laws of the Cosmos” (New York, Alfred A. Knopf, 2011).

          1. mansoor h. khan


            Something for you to think about? Is it possible to break through the matrix (the “maya” and “leela”)?

            My answer is yes! We are kind of starting to do it on this blog. We only have a “bookkeeping” problem and not a “not enough real wealth” problem (thanks to F. Beard for putting so simply).


      2. mansoor h. khan


        Be more hopeful. I am being only partially serious by proposing such a solution in an attempt to mock the banking cartel and show others how ridiculous their game is and simple the solution is.

        We don’t have a money scarcity problem! There is plenty real money (roads, infrastructure, farms, factories, trained willing able creative labor, knowledge, rule of law, police, fbi, internet, etc).

        We have bookkeeping problem created by a usurious system possible only by fraud and deception of equating bank money to government money in peoples mind and lying to the people that governments issue money (truth is that most currency by far in circulation is issued by the cartel).

        Mansoor H. Khan

        1. LeonovaBalletRusse

          mansoor h. khan, your conclusion is exact. Do you know the work of Prof. Guido Giacomo Preparata, a champion of Thorstein Veblen’s “The Theory of the Leisure Class?”

 – free downloads to make your head spin

      3. F. Beard

        Let the bankers spend (not lend) money into the economy metered only by the amount of credit money (currency) destroyed. Let them live like kings. mansoor h. khan

        That’s not going to happen in the US. The precedent it would set is awful. Money creation necessarily confiscates purchasing power or prevents its increase. The government properly has that power (for its money only) and should use it for the general welfare.

        As for private money creation, let those who can do but without ANY favors from government such as a lender of last resort or government deposit insurance.

        1. mansoor h. khan

          F. Beard,

          This solution (letting bankers spend currency freely into the economy debt free) is better than suffering through a deep depression worldwide.

          Also, if the cartel were to accept this deal eventually people will see the true nature of money and see that the cartel has no clothes and they will be done away with.


    3. Dan G

      How about lertting the present system collapse. Debt forgiveness for the masses, and let the banks that levered too much fail.

      1. F. Beard

        The savers would whine and with good reason; banking cheats savers too – of honest interest rates.

  8. SidFinster

    Very unlikely that Germany will exit the Euro any time soon. Not for any rational reasons – rather because the entire political class in Germany, left, right and center, have already committed themselves to the Euro, up to their necks.

    Admitting that the Euro was a monumentally stupid idea and a failure would amount to admitting that they themselves are incompetent, incompetent to the point where their legitimacy is in question. It is like what happens when a cult leader predicts the end of the world guaranteed, and here all still are.

    But unlike prophecies of Armageddon, the Euromadness does not have a definite sell-by date. So the average frustrated German may long for the return of the Deutschmark, but every politican’s response to that frustration is to clamp their hands over their ears and yell “I CAN’T HEAR YOU!” or “YOU SAY WE MUST HAVE ‘MORE EUROPE!’?”

    This is why the German political establishment has been so tone deaf with regard to the electoral messages that the voters keep sending every time anyone bothers to consult them.

    This is also why the German and European leadership is so ready to ignore their own laws, and noone in politics calls them on it; even if an opposition could score easy points, the government and opposition are in it together.

    When those laws were adopted, restrictions on mass money-printing, loan guarantees, bailouts, etc. were all sops to silence objections coming from the knuckle-draggers. But now those bailouts are needed so that the political class can save their project and by extension their own political necks, and they are not about to let niceties like the law get in their way.

    (During the Euroadoption process, the press and politicians treated those who pointed out the manifest glaring flaws in the Eurodesign with the sort of disdain usually reserved for someone who loudly asks the Pope whether he just broke wind during a public audience.)

    The result of all this is that to restore sanity in Europe, first, things will have to get much worse, to the point where the existing leadership are so discredited that their legitimacy fails, and new forces with no ties to the existing system start to become a viable alternative. It is safe to say that the NC readership will not like the looks of some of those new movements.

    Application of this model to the United States is left as an exercise to the reader.

    1. LeonovaBalletRusse

      SidFinster, exactly so: How can the political class and the *saviors* save face and keep their strategic positions at the top of the pyramid if the euro goes the way of the dodo bird?

  9. Lafayette

    I also cannot help wondering how the relatively high government ownership or involvement in German banks somehow plays a role in the matter EuroZone bank solvency.

    But an Internet search on the matter does not show anything of direct pertinence. Except for the fact that it appears to be a continual subject of research in terms of bank stability.

    1. SidFinster

      IIRC, the Landesbanks (owned by German states, or Laender) used to be allowed to issue debt guaranteed by the German Federal Republic. The issues were subject to some restrictions, but unlimited in volume.

      Hence the Landesbanks were able to finance themselves almost for free. This where a lot of the money that eventually found its way into dubious MBS came from. This money also fuelled the expansion of the Landesbanks, into places and business lines where they had no clue. (You have to remember that retired politicians are often rewarded with a senior post in a Landesbank.)

      This was finally ended around 2004. Of course the Landesbanks were not happy, so after much lobbying, they were allowed one final year of government-guaranteed debt issuance. Of course, the Landesbanks went nuts in that last year, buying everything and anything, as the party was ending soon.

      The Landesbanks have been monkeyhammered by the crisis. (As happens when not-particularly good gamblers are given free money to gamble with). That debt comes due around 2015.

      Therefore, anytime you read about German state debt, remember that Germany will have to clean up the Landesbanks (again) in about three years, give or take.

      1. Positroll

        That’s pretty far away from what really happened.

        The European Commission during the naughties forced the German Landesbanken to switch from their old model (doing boring lending in their home state at low rates while being backstopped by the public) and to act like “normal” banks. Result: they had to chase yield and started investing German money in the PIGS and (now worthless) US papers.

        So while the EU Commission defended “free competition” (yeah, right, because nobody would never bail out private banks, now, would they … ?) it reduced German growth while artificially inflating the PIGS and making the Landesbanken very vulnerable. Thanks a bunch.

        (recently the IMF has been continuing this B.S. by stating that the Sparkassen – though they were the one anchor of stability during the GFC – should be privatized, too, all in the name of liberalisation of markets. Don’t these guys ever use their brains ???)

        1. SidFinster

          What you write doesn’t seem to contradict my narrative.

          I know that until recently, Landesbanken were the most boring financial institutions around, and their regulatory environment did not give them much choice. That said, I thought that they were clamoring to be released from their regulations so they could go chase yield.

          Admittedly, German businesses being conservative borrowers and Germans being diligent savers, so straight banking in Germany is a low-margin business by nature.

        2. LeonovaBalletRusse

          Positroll – *forced* is the key word. Isn’t this exactly what happened in the U.S.A., after Glass-Steagall disappeared and *Banks* had become conglomerates of banking/brokerage/insurance*, and State banks were given the *offer they couldn’t refuse*? The *local* banks were *forced* to accept the *fact* that BigBanks would occupy their turf, and they had to play by their rules or else?

          You got a problem with that?

        3. Lafayette

          all in the name of liberalisation of markets. Don’t these guys ever use their brains

          Which is kinda stupid as a remark.

          The EU is the one kicking ass to get European government out of private markets. This is particularly the case in Germany, where it is heavily involved.

          Why? Because when the government owns part or wholly any business (whether finance or manufacturing) it has to kick-in to pay for the losses, which only increases state indebtedness.

          Which has been a recurrent “illness” of EU governments. So, the measure is intended to get companies off the state dole.

          I’ve seen this work in France where, for instance, the Post Office is finally being privatized. TV is finally privatized. Telecoms is finally privatized. The national rail system is privatized. All of which is goodness.

          Duhhhhhhhhh …..

    2. LeonovaBalletRusse

      Lafayette, as has recently been revealed, the Eurorentier class shares DNA, attends the same kindergartens, gymnasia, universities, etc. so that breeding, banks, and government are ONE (%). This is the *top out of sight* class and their visible agents since Charlemagne at least. See Paul Fusell: “CLASS.”

      1. Lafayette

        I don’t deny what you say.

        They all sun themselves in St. Tropez and winter in Davos.

        So … ? They will be paying higher taxes this year, which the American government systematically refuses to do out of some hair-brained notion that the taxation trickle-upwards money-pump must not be touched.

        Here’s my favorite info-graphic (yet again) in the matter of American marginal income taxation and national debt. Look at the 1980 decade (when Reckless Ronnie came to power). Note the inflexions in both lines – taxation (in red) precipitously down and the national debt (green) creeping upwards.

        No connection between the two? Pure happenstance?

        Yeah, right.

  10. TheTenPercent

    Love the whimsical imagery of patting the event horizon.

    More seriously, isn’t it clear the Germans are holding out until the French cry uncle and accept fiscal oversight??

    1. Lafayette

      isn’t it clear the Germans are holding out until the French cry uncle and accept fiscal oversight??

      The French have already done so.

      The EU now has the right to send inspectors into any country to audit its national accounting as regards expenditure and debt levels. The provision of applying fines for breaking the debt/gdp ratio speed limit did not work.

      Which was a rule that the German’s insisted upon when signing the Maastricht Treaty that brought the Euro into existence. Unfortunately it was never applied by the Commission in Brussels. (The Commission in Brussels is run by the countries and has little formal independence.)

      Next on the horizon? Merkel and Sarkozy are debating the means by which the signed treaties regarding the Euro can be tampered with to allow the ECB to buy homegrown national Euro-debt.

      Let’s not forget that the German Supreme Court has its word to say as regards EU treaty obligations. It has done so in the past, which constrains somewhat German Chancellors (Merkel) in what they can do.

      (Unlike the conservative nitwits on the Roberts Supreme Court in the US that legislate from the bench by fanciful interpretation of the Constitution.)

  11. Andrew

    Quit pissing around. Nationalize every man jack of them and put public purpose into banking.

    I’d choose democratically accountable arschlochen over totally unaccountable arschlochen any day of the week.

    1. Lafayette

      Nationalize every man jack of them and put public purpose into banking.


      France did that with the election of Mitterand in 1981 and the French economy went into a long-decline from which it has yet to climb out.

      We have regulatory oversight powers in place. Let’s use them.

      The Dimwit Dubya administration neutered the oversight agencies (throwing a bone to the corporate-PACS that funded his candidacy) and all hell then broke loose. Obama should prompt the Attorney General to go after the malfeasance on Wall Street that is almost certainly fraudulent and it will take some time to gather the proof.

      A couple of perp-walks at the top of some investment-bankers, with confiscation of their ill-got gains, would be a highly salutary lesson to all of them.

      Frankly, we could do as the Romans. Cut off their hands and nail them to the doors of the Stock Exchange. (The more denser ones would get the message? Maybe not … ;^)

  12. Bernard

    A bailout by the Germans is just that: a bailout. Everyone seems to want to kick the can further down the road. this time, to have the Germans throw good money after bad. More EU control over German taxpayers.

    Bad Germany, it won’t throw more Good money after Bad Debt. Obviously, no one wants to understands why the Germans hesitate to “rescue” the Banks.

    Germany loses no matter what. Either it buys Bad/Worthless Debt, and further screw itself, or it gives in and up and lets the Thieves/Bankers get away with theft/extortion.

    amazing. Those Bad Germans, if only they would save the Bankers. As an
    American who is paying for the Vampire Squid, enough is enough.

    there must be a day of reckoning. just so we can start over. Extend and Pretend is worse.

    1. Lafayette

      Everyone seems to want to kick the can further down the road. this time, to have the Germans throw good money after bad. More EU control over German taxpayers.

      More nonsense.

      The above comment demonstrates a disregard for what is happening behind the scenes.

      There is now official country budget reviews in place that will prevent the past profligacy of spending and ensuing debt.

      The EU treaty needs revisions such that ECB can legally assume a larger portion of national debt – in exactly the same manner that the Fed is employing Quantitative Easing 1 &2.

  13. LeonovaBalletRusse

    Yves writes: “I would not be so optimistic.” This and the conclusion that follows is a just assessment of the situation; and the CDS activity by U.S. players confirms it. So, “what more can we do?”

    I guess the vice needs one more turn for the Junker Class to get the message that “the times they are a-changing.” Maybe they expect another Marshall Plan to bail them out if they blow it. It appears that it’s *just not in them* to adapt as seasoned Americans are when it comes to crisis management on the fly, at neutrino speed. Also, as history shows, Americans rich and poor will cooperate when the chips are down. Mayflower DNA (Carver here) will out: not at the “Country Club” but on the ground and on the fly.

    Yes, Yves, we WILL survive together on this our promised land, through thick and thin: from 1776, 1812, 1865, 2008, and still going. When the chips are down, we choose reason.

    Thanks for being the *paradigm for specific performance* in our broadly open society, including the hyper-rich and the down and out, where cream rises to the top. You are living proof of what democracy is good for. Mazeltov!

    “Interesting times” indeed. Keep us posted after the duck feast, if you feel so inclined.

    1. LeonovaBalletRusse

      Yves, don’t you think the fundamental issue is whether the Europeans can be *good sports*? The ability is be a good sport is one of the American virtues, although the British Empire would claim it as their own (they are good sports within class lines, however).

    1. mansoor h. khan


      I am not sure what you mean?

      This is a practical transition to government only money system solution I have proposed that I think is doable.

      I also like F. Beard’s bailout metered by credit money destroyed solution. Of course, we really need a combo solution since credit default swaps need to be canceled/bankrupted out of the system.


      1. LeonovaBalletRusse

        mansoor h. khan, I second the acceptance of the Beard’s suggestion.

        What I mean is, since you wrote your article in 2009, how do you square your program with the *pragmatic* solutions proferred in 2011, especially at NC lately? For example, your acceptance here of Beard’s idea is a start to your revision, n’est-ce pas?

        This site may serve you well. And it’s free! Although there is a tip jar, and there are various ways to contribute to the vitality of Yves Smith’s marvelous NC site. She has set the tone for generosity of spirit, as you can see.

    2. mansoor h. khan


      My main idea is unchanged:

      All money should be government money and modern money is a ledger entry.

      Therefore, we need a ledger keeper (a government bank) and we should get rid of deposit insurance.

      Doing this much will crumble the banking cartel and we will no longer have deep recessions and depressions.


        1. mansoor h. khan


          Even MMTers need to learn that while their ideas are sound (meaning consistent with reality as described by Keynesian economics on how the currency relates to the goods and services production process) fundamental money reform is needed. All money should be government issued.

          MMTiers will slowly learn that while their ideas are sound it is the banking cartel which is keeping the public confused.


          1. LeonovaBalletRusse

            Mansoor, your point is made. You would profit from the insights into the *criminal class* of Veblen, Preparata, Bill Black, and Gabor Mate combined. It’s the *mindfix*, the *neuronal circuitry* in response to abuse, loss and chicanery, passed on from generation to generation.

            It is the revelations of *Brain Science* that will help guide the Titanic to open water in a *parallel universe*. This is where new insights into *Ethics* enter the picture.

          2. LeonovaBalletRusse

            Mansoor, above I meant the *criminal class* as seen and whose *mindset* is described by Veblen et al.

          3. mansoor h. khan

            Now you know the problem.

            Start educating, educating, educating…your wife, kids, relatives, co-workers, neighbors and then ask them to educate, educate, educate…spread the new economic religion

            …that is how the cartel will be broken

            The cartel can be broken. They are not god. There is only one god and it is not them!


  14. Parrot patrol

    One nit re : “more nodes and more communication lines between those nodes means more points of failure.” It would be more precise to say that system reliability depends on the network’s topology, rather than on its size: long serial “and” connections hurt and parallel “or” paths help. This minor point comes into play mainly because the kleptocrats love to use reductive system-theory arguments to argue against “government,” meaning regulation. Any new regulation is red tape, while any corporation’s Rube-Goldberg kluge is just the market. I can just hear the bankers’ shills in congress parroting “points of failure!”

  15. Philip Pilkington

    “…quite a few members of the NC commentariat continue to argue that the Eurocrats will come around in a crisis, just as the US did. I would not be so optimistic.”

    I’m not as optimistic as all that. That’s why Mosler — Mr. ECB Backstop himself — and I sketched an exit plan. There could be much faffing by the eurocrats. They’re an incompetent bunch. Be afraid.

  16. Siggy

    I once ate something disagreeable. I was not well until I excreted and barfed all that was in my alimentary canal. Now as to the European credit problem. It’s really very simple; extinguish the unservicable debt. Balance government expenditures with tax receipts and modest borrowing relative to the national ability to create GDP.

    Net result, you get a large number of over large banks that need to be nationalized, a deep but relatively short depression and within five years all will be hunky dunky.

    But then, no one wants to accept the five year depression. Given that we are unwilling to accept the depression necessary to delever the global economy, we are probably past the point of redemption and in that which is the denouement of our crap think fiat currency and fractional reserve banking system.

      1. LeonovaBalletRusse

        Monsoor, with all due respect for your hard thought and work, I believe you are missing something fundamental. You appear to be within the net of MMT.

        The work-out must be out of the net. Think set theory and “parallel universes” — connection without entrapment.

    1. F. Beard

      Balance government expenditures with tax receipts and modest borrowing relative to the national ability to create GDP. Siggy

      That sounds very reasonable BUT:

      1) A monetarily sovereign government has no need to borrow and should NOT borrow. Government borrowing is an unnecessary expense and benefits some (typically the rich) at the expense of everyone else.

      2) Does GDP growth allow money growth or does money growth allow GDP growth? Therefor an open loop solution (eg. grow the money supply at 3% per year) is not what we need if we desire optimum economic growth.

        1. F. Beard

          I believe with engines it is better to run the mixture too rich than too lean. Also:

          The generous man will be prosperous, and he who waters will himself be watered. Proverbs 11:25

  17. Gloomy

    Yves-This is really easy to figure out. Germany is simply following the IMF prescription

    1. Let the weak countries default, providing them debt relief.

    2. Devalue the currency: Create enough chaos to send the Euro to parity with the dollar, helping the economies of the defaulted countries and incidentally boost German exports.

  18. don

    The choice is framed as one between the NC wish, No. 1, or that pointed out by others, No. 2:

    1. saving the financial system from collapse so that the economy doesn’t collapse, or we will get a severe economic depression;


    2. stepping aside, allowing the financial and economic system to collapse then pick up the pieces, and over time expect a re-start of healthy, undistorted economic growth.

    No. 1 assumes that once the ticking time bomb of financial collapse is defused, political reform of the economy can get underway.

    No. 2 is more in line with letting markets collapse so that markets can then do their magic in the vein of creative destruction.

    Is there not a third option: turn the financial system into a publicly owned and managed system designed to actually support an economy. That way the system is prevented from collapsing while the resulting global economic depression is also prevented. OK, not politically realistic. Its not going to happen, period.

    Lets face it, governments are not going to simply step aside and let the financial system collapse. This isn’t to suggest that that collapse will thus necessarily not happen. But to think that governments should simply step aside is unrealistic.

    Expecting, however, as NC and commentators imply, that that following the financial system bailout (saving it from imploding), then provides the breathing space to bring about structural reform and re-start global economic growth (solution: increase aggregate demand) strikes me as just as unrealistic and naive.

    Implicit in the path of No. 1 is the notion that perpetual economic growth/expansion is not only desirable, necessary, but also possible in the long term. The flip side to increasing global consumption as solution is the notion that economic growth is an imperative (which under the capitalist economy is true), and thus can’t be realistically challenged. Perhaps in reality that is where we are today, and have been for some time. Perhaps limits to growth will eventually force our hand, and perhaps this is where the entire argument made by the bailout/increase aggregate demand prognosis falls on its face, for the bailout/increase aggregate demand is at its very core a perpetuation of the status quo: that perpetual economic growth/expansion is desirable and possible.

    1. Yves Smith Post author

      You are missing the example of World War I. No one in the European leadership wanted a war then either, just as no one wants a collapse of the financial system now. But they were locked into treaty obligations and weren’t able to communicate quickly enough with each other to devise a work around (ie, the treaties created a tightly coupled system, where actions “executed” faster than the ability of the overseers to intervene).

      Here the Eurocrats are locked into assumptions as to what is the “right” thing to do and are also confronted with other perceived constraints (for instance, the head of the Bundesbank insists that Eurobonds are a violation of Maastrict rules). Meanwhile, the crisis develops apace. Their politically-driven reaction times, and perceived difficulties in implementing any of the measures that could buy more time is likely to produce a train wreck.

      I don’t see why it is so hard to understand that intent and action are two different things. If they were the same, no one would be overweight either.

      1. SidFinster

        The idea that “noone wanted WWI” is not entirely true to my understanding – noone wanted WWI the way it turned out, but a lot of people in the years before 1914 thought a war would be necessary.

        On the one hand, France was itching for revenge for the disasters of 1871. On the other hand, France was anxiously looking over its shoulder at the German Empire and its growing industrial capacity. If this continued one more generation, French planners knew that not only would the recovery of Alsace-Lorraine be out of the question, but France would be at the mercy of the Kaiser.

        For its part, Austria-Hungary was growing increasingly nervous that its position in the Balkans would be supplanted by Serbia (in particular Conrad Von Hotzendorf, Chief of the Austro-Hungarian General Staff saw an immediate war with Serbia to be the solution to every problem from agricultural overproduction to Original Sin). This is part of why Austria-Hungary took such an aggressive position after the assassination of Franz Ferdinand, in spite of Serbian efforts at conciliation.

        And as the German General Staff pored over their demographics tables, they knew that if they did not fight and decisively defeat Russia and do it soon, rapid Russian population growth and industrialization would soon make turn the Russian Empire into an unstoppable juggernaut.

      2. Seattle Andrew

        Yves, SidFinster’s right here. Lots of people wanted WWI, just like more than a few people are hoping for some sort of cleansing collapse in Europe. Another lesson from WWI is similar, but if anything more terrifying. The leaders of Europe, particularly military leaders in France, were locked into a military ideology that was completely out of step with what was needed – the philosophy of ‘attaque a outrance.’ They couldn’t see that the only way to defeat Germany was to dig in, so they lost a sixth of France and millions of men because they couldn’t see a better way. I can’t think of a better analogy for the still-current beyond all reason belief in neo-classical economics, both at home and in the Euro-zone.

        1. SidFinster

          By the end of WWI, anyone with the brains that God gave a cat could see that the Powers That Be, to an extent in England and France and completely so in Germany, Austria-Hungary, and Russia, were so utter incompetent and morally bankrupted that they had forfeited any legitimacy.

          And that what brought us the end of of the nineteenth century, not to mention the end of the Habsburg, Romanov, and Hohenzollern dynasties – noone (at least outside the inner circles) believed in them anymore. To give the example of Russia – the Tsar still had plenty of men, but not enough men willing to fight or willing to make others do so.

          Romantic myth aside, it is rarely the 99% that overthrows the 1%. Rather, the 1% loses its internal cohesion and faith in itself, and then implodes. Sometimes the 99% helps out, but even V.I. Lenin harped incessantly on the role of the vanguard party.

          1. LeonovaBalletRusse

            Quite so. This is the *neuronal circuitry* of the 1%, again and again:

            Guido Giacomo Preparata: “CONJURING HITLER”; Thorstein Veblen: “The Theory of the Leisure Class”; Carroll Quigley: “The Anglo-American Establishment”; Preparata: “The Ideology of Tyranny”; Correo de Oliveira: “NOBILITY and Analogous Traditional Elites in the Allocutions of Pius XII”; etc.

            Can what we learn from “Brain Science” and “addiction studies” help to “undo the folded lie” (W.H. Auden: September 1, 1939″)?

            Are we compelled to keep doing the same thing again?

        2. lambert strether

          They may have wanted a war, but it’s not at all clear that the war they got was the one they wanted.

      3. SidFinster

        As far as today’s Eurofiasco (and your larger point) – you are right in that no Europolitician really wants the breakup of the Eurozone.

        They may want to tighten the screws on a debtor here or get some relief from creditors there, but they basically want to go back to the Good Old Days of 2005, when easy money was at hand, politicians and financiers slapped each other on the back, moral superiority was free for the taking, debt and equity markets could be jawboned up, and noone asked unseemly questions like “So is there anyone ion this place who can make these numbers add up?”

        But politicians are short-sighted sometimes, and torn between competing objectives that cannot all be satisfied. And 2005 ain’t coming back, no matter what clever tricks the politicos and financiers think up to try and make money appear out of thin air.

        As Gillian Tett (channeled by Y. Smith) pointed out, somebody somewhere will have to eat that bad debt. The only question is who and how much.

        1. LeonovaBalletRusse

          “who and how much” — Don’t you know the answer, according to the 1% *en bloc*? That’s what they STILL are trying to make happen. Only more tightening of the vice will cause dissension in the ranks. The smart money will break ranks; or the old money will will force the issue again, and bring the next *Thirty Years War*, or perhaps the nuclear winter.

        2. SidFinster

          Sorry for the board-jacking, but one other possible difference between the Eurofiasco and the onset of WWI – or perhaps a similarity: It may be that the pre-1914 system of nations was sort of stable. It had held from 1871 or 1879 through 1914 and was getting wobbly, but unlike the Eurosystem, it was not locked into rules which made it fundamentally unworkable in its current form.

          Then again, perhaps the growing power of Germany, Serbia and Russia in the decade before 1914, combined with Austrian and Ottoman lethary, made the war just a matter of time. (One school of thought suggests that if Britain and France had put the beat-down on Germany after the Abokir Crisis in 1905, when Germany was still relatively manageable, millions of lives would have been saved.)

          I haven’t even gone into how the Naval Race between Britain and Germany affected everything.

          1. LeonovaBalletRusse

            The *Industrial Revolution* intervened then, as the *Robotics Revolution* has lately.

            But must we be driven by the *neuronal circuitry* of those who worship HiTech as *Moluch* and despise flawed humanity?
            Can insights from Brain Science and Addiction Studies lead us to better “revolutions” with more humane outcomes?

            This is more than *education*. This is Auden’s “undoing the folded lie

      4. LeonovaBalletRusse

        Yves, the Old Euro Guard is not nimble, they are not *quick*, as any pilgim or slavestock had to be in order to survive long enough to pass on their DNA unto 2011. They are comfortable with “as it was is now and ever shall be, world without end, Amen.”

        They are not at all comfortable with *taking a flying leap* into a potentiallly better future, or with *crisis management on the fly*. A separation between *intent* and *action/event* is unsettling. They do not like surprises.

        Control freaks are quaking, or readying for top down war.

  19. Leverage

    “This solution (letting bankers spend currency freely into the economy debt free) is better than suffering through a deep depression worldwide.”

    And why them and not you or me? Are they special? Seriously?

    This crapp has to end, and all of you who are rationalizing this are just part of the problem (hypocrisy, laziness and moral hazard all the way).

    1. F. Beard

      And why them and not you or me? Are they special? Seriously? Leverage

      Precisely. Private money creation can be done ethically via common stock as money. Banks are not even needed.

    2. mansoor h. khan


      These dudes (the banking cartel) is serious. They will keep us confused and likely make us descend into a dark age just to keep their power.

      Why not transitionally let them be kings? Everybody will then see they have no clothes. Their own kids will be ashamed to associate with them and eventually we will take the currency issuance powers from them.


  20. Pragmatic Realist

    Over at “Counterpunch”, Paul Craig Roberts, former asst. sec’y of treasury under Reagan and a really gloomy guy, has this to say. I am wondering what you think about it.

    I suspect that the answer to this question is that the failure of the German government’s bond auction was orchestrated by the US, by EU authorities, especially the European Central Bank, and private banks in order to punish Germany for obstructing the purchase of EU member countries’ sovereign debt by the European Central Bank.

    The German government has been trying to defend the terms on which Germany gave up control over its own currency and joined the EU. By insisting on the legality of the agreements, Germany has been standing in the way of the ECB behaving like the US Federal Reserve and monetizing the debt of member governments.

    From the beginning the EU was a conspiracy against Germany. If Germany remains in the EU, Germany will be destroyed. It will lose its political and economic sovereignty, and its economy will be bled in behalf of the fiscally irresponsible members of the EU.

    1. Fiver

      I was working on my comment when you posted yours. I believe there is a good measure of truth to what you’ve quoted here.

      To think the US has been just standing by watching is ridiculous. Note how the “Greek crisis” surfaced with the winding down of QE1 in spring 2010, and again in spring 2011 after QE2. I cannot understand how people can (rightly) revile Wall Street, know it has long since completely fused with Washington, and somehow REFUSE to believe the same US that blithely destroys say, Iraq, is not also quite capable of simply destroying anyone or anything that gets in its way – ally, or not. As if it’s not the frigging Empire it is.

    2. scraping_by

      Actually, that makes it sound like it’s financial attack for the sake of finance. Money for the sake of money is a widely spread character flaw, but most people see money as a means, not an end.

      It makes sense to see the ECB monetizing debt as an attack on the smaller, less rich countries. Debt is power. By now, we see their power over Greece and Italy. Starting to print money and gather IOUs that will be the pretext for “technocratic” governments for all overleveraged countries.

      We tend to think of attacks in obvious terms. While it’s true the ECB could hire Blackwater “contractors” to “guard” their interests in Greece, Italy, Spain, Portugal, Ireland, etc., it’s also true they can get the same measure of control by subverting those governments by burying the nations in debt. Slower, but less liable to blowback.

      Debt is power. The Pan-European technocrats are going after power of obligation over a large part of their continent. Perhaps, someday, they’ll have it all.

      1. LeonovaBalletRusse

        scraping_by, you would profit from studying “THE BUBBLE THAT BROKE THE WORLD” by Garet Garrett (Boston, Little, Brown and Company, [June] 1932) — via the LINK:
        offered on this site today by *lloyd blankstein*. It is a crucial read right now, extremely timely, a *forgotten* treasure.

  21. Fiver

    I find it truly strange that so many people on the one hand correctly identify predatory finance and captured governments/regulators as central to the problem, but on the other excoriate elected politicians, not all of whom are either stupid or evil, for taking “too long” to respond, or “get their act together” – ignoring the fact that “markets”, which absolutely ARE the weapons used by the banksters, are attacking, as in DELIBERATELY ATTACKING sovereign states/democracies. What gives with the notion that the only option is to further concentrate power, hit the print button, etc., i.e., DO WHATEVER IT TAKES to preserve this system as is, when what everyone ought to be doing is pushing for anything BUT that option. Because, as Don so correctly observes, we’ve seen again and again and again that even the pathetic degree of “resolve” exhibited by elites to truly address fundamental problems after “fixing” the emergency they themselves create evaporates immediately, and as sure as shit, a worse crisis is assured. But for now, ask just who stands to win in this war if Germany folds. With the Euro destroyed as an alternate world reserve currency, the US (the centre of global power, financial and otherwise) both keeps the enormous global subsidy provided AND can devalue further, irrespective of how damaging it is to weaker players who simply don’t count in the calculus of those who wield real power.

    Consider what such a capitulation portends, not just about the current mess, but for ALL FUTURE PROBLEMS involving the huge, complex systems of all kinds we’ve so thoughtlessly created and whether we have “time” or “patience” for democracy at all? If the Management did not land us here, who did?

    I don’t buy that there is no third option. Of course there is. It will not be painless. It will be tough – as so much of value in life truly is. But there is NO REASON to believe it cannot be handled in a way that properly, and I do mean PROPERLY, protects those most disadvantaged. No more of this “print of else Depression” crap. If we turn our backs on democracy, if we turn our backs on the very idea that we have a CHOICE, we are simply doomed – because the financial and technological sociopaths who’ve created this wholly unsustainable global consumption machine will CERTAINLY take us straight into a Hell that makes a Depression look like a picnic.

    1. LeonovaBalletRusse

      Fiver, your comments are just. This is why “The Shock Doctrine” on steroids has hit the homeland: *Lebensraum* for the 1%, by any name.

  22. Seth

    This is not rocket surgery. It is impossible to stabilize a system of highly leveraged debt by paying off the unwise bets of the the most leveraged actors at the top of the pile. It is only possible to stabilize the system by bailing out the people upon whose shoulders the leveraged debt is resting.

    1. F. Beard

      It is only possible to stabilize the system by bailing out the people upon whose shoulders the leveraged debt is resting. Seth

      I believe you are correct. But that would admit that the population has been victimized.

      1. LeonovaBalletRusse

        F. Beard, that could be admitted. But history does show that no Alpha Dog gives up power without a fight, likely unto death.

          1. LeonovaBalletRusse

            Powerful, eloquent, dissident art mashups. I wonder why Leonardo di Caprio is substituted for the cop in one frame. Anybody?

  23. Hugh

    I wonder who scheduled the bund auction before the Thanksgiving holiday. US markets may be totally divorced from reality but they have been major engines pushing back against the gathering gloom in Europe. It usually works that US markets have a bad day along with the rest of the world and then because Armageddon hasn’t happened quite yet they quickly go about picking up the pieces and acting like all the talk of a financial End of Days never took place. But here you get a bad auction, a bad day in markets, and then another day of no pushback because of the holiday. That leaves only a Friday for anything and then you have the weekend and Asian and European markets again ahead of US ones on Monday. If you wanted to design a situation where US markets were cut out of a lead role for 5 days, and 3 business ones, you would be hard put to find one.

    We all know that Europe is going to crash. The math doesn’t work and nothing serious has been done to change it. This is the same argument you make about a bubble. A bubble’s math doesn’t work so its burst is a given. It is only a question of when. Again recalling 2008, shocks became both larger and more frequent in the runup to the meltdown. Fundamental problems were not addressed. Solutions remained ad hoc tailored to specific incidents. The differences are not at all encouraging. Europeans leaders and financiers are as Yves points out even more out of it than their American counterparts were in 2008.

    So a crash is inevitable but what is important to remember is that from a kleptocratic perspective crashes introduce opportunities to assert greater control over government and greater ownership over wealth. A crash is brutal for the 99%, but for the 1% crashes are a kind of godsend.

    1. Fiver


      You must bear in mind that the European financial and political elites had to operate within the Rules Box the US had constructed, just as Japan has. Japan’s bubble, for instance, was in good measure the result of intense US hostility towards Japanese success in the late 70’s and especially 80’s – it simply was not allowed to acquire enough solid Western assets, or to otherwise diversify on anything like the scale its surplus required, even while its exporters were subject to repeated efforts to bleed them. The bubble’s burst was immensely traumatic for Japan. It has for 20 years done nothing of import without consulting the US (i.e., the Fed) first. The recent quake has been another terrible blow. Japan is exceptionally vulnerable now and I rather fear it’s next on the list for pillage.

      With Germany, the friction was less obvious until the fall of the Soviet Union – in other words, so long as the US desired German strength. That changed when the US betrayed Gorbachev and left the Soviet Union to spiral into an enormous disorderly (a mammoth understatement) breakdown, when only Germany offered any real financial assistance to Eastern Europe, former Soviet Republics and Russia. When Germany then made clear its intention to re-unify, the “Allied” (US/UK/France) response was the invention of the EZ project as a method of “containment”. This all took place, you’ll recall, at the same time as the derivatives wizards were just launching their insane risk experiments, i.e., spreading the risk = no risk, this thanks to Harvard, Rubin, G. Sachs, JPM and Clinton among others.

      The latter point is critical. The whole derivatives industry was AGGRESSIVELY sold to EVERYONE as a veritable miracle of efficiency and safety – the “perfect” tool for development, which is precisely what Southern and Eastern Europe desperately needed – as did the 100+ million Americans who formed (and reformed) the permanent underclass.

      Even so, it WAS safe enough to manage in Europe – so long as the anchor of it all in the US was stable, i.e., until the an historically without precedent epidemic of fraud consumed the US, setting off all those derivatives bombs, destroying global financial stability. It COULD STILL BE SALVAGED NOW, were it NOT for the orchestrated, ruthless attacks on the currencies of weaker nations with the specific goal of instituting the global, corporatist “Market State” as envisaged by such US policy luminaries as Phillip Bobbit – centred in and led by none other than the US of course.

      It is impossible for Europe to resolve this in its own interest without US regulatory cooperation to STOP the attacks, which of course cannot happen since those regulators are completely captured. As that will not be forthcoming, then, Europe must therefore seek its own solution (Germany and Northern countries exit, the South and Ireland keep the Euro if they wish, and France makes its own very tough choice between the two is one such option – there are others) or they all lose 20 years they will NEVER get back.

  24. Eric

    ”meaning Germany’s addiction to running big trade surpluses”

    wrong, meaning some Southern countries living beyond their means or borrowing for speculative investments (housing bubble)

    1. mansoor h. khan


      You are both right. That is the problem with the our banking system. Bankers know that if they don’t continue to lend the system will collapse. Net loan growth cannot be negative for too long. They are literally forced to continue to lend regardless of loan quality.

      Since loans outstanding = currency supply

      but if currency supply is decreasing for a sustained period of time then we will have a depression event (which is not pretty for the people or the bankers).

      Way out: currency should always be spent into existence and never lent into existence.



Comments are closed.