Eurobanks: The Probable Point of Failure as Systemic Stress Rises

As all major financial markets – stocks, currencies, commodities, and bonds – continue to be highly volatile and risk averse, investors’ mood, and even that of real economy players, is getting nervous and gloomy. Both the masters of the universe at Davos and corporate CEOs have an uncharacteristically subdued outlook for the upcoming year.

But the open question is how much financial market stress transmits into the financial system and/or the real economy. The portents do not look good. Yesterday Ambrose Evans-Pritchard tried arguing cheerfully that the stock market rout was a good thing, since it takes out the unwarranted premium in equity prices in a time of earnings growth almost entirely dependent on stock buybacks, and that cheap oil was good for consumers. But it’s one thing when a downdraft corrects froth. It’s another thing entirely when it is a symptom of years, actually decades, of bad policies.

What should trouble commentators and analysts most, and this is implicit in the market upheaval, is that the officialdom, most importantly central bankers, who have developed the bad tendency to assign themselves the role of economic first responders (when they would in cases have been better served to sit on their hands and force governments to step to the plate to do more spending) have no idea what to do now. From John Authers of the Financial Times:

The sense that central banks can no longer be relied on as the ultimate backstop for the system has helped trip markets into something close to panic

Authers ascribes the funk to reflexivity, which is Soros’ concept that in financial markets, investor actions and beliefs can be self-reinforcing, in a seemingly positive (momentum trades) or seemingly bad way (self-reinforcing panic). The reason this simple idea is important is that economists have fetishized the idea of equilibrium, which denies the idea the feedback loops of the sort that Soros has used to make himself rich exist.

But it’s worse than that. Authers describes multiple examples of how official actions have not just produced unintended consequences but backfired. Yellen wanted to “normalize” rates to help banks but (among many other things) flattened the yield curve, which makes their lives even worse than they were before. Another is the way Bank of Japan moved to negative interest rates. Its main purpose (as we discussed) given that it was designed to have as little impact as possible on banks and depositors, was to weaken the yen. But the yen instead surged.

This is replay of a pattern we saw in the runup to the last crisis, and that Richard Bookstaber warned about in his classic book, A Demon of Our Own Design. In tightly-coupled systems, and our system of large interconnected global banks and high levels of cross-border capital flows is a tightly-coupled system, measures intended to reduce risk typically wind up increasing them because no one really understands how it operates. He warned that the only way to reduce risk is to reduce the tight coupling. We see very little evidence that anything of the kind has happened much, and the increase in concentration at the biggest banks suggest if anything that it could be worse.

And the central bankers’ reflexes of what to do next are poor.

We’ve said that negative interest rates are a terrible idea. Super low rates are already slowly killing life insurance companies and pension funds. Negative rates will do them in even faster and will do serious harm to banks, as we explained longer form earlier this week.

Banks in the US were pushing for higher interest rates, one assumes understanding the transition costs (banks are structurally long, so even if they trade cleverly, they’ll suffer losses on all but their shortest-term assets). The reason is that they face a long-term profit squeeze at super low rates and they need to get out of the corner the Fed painted them in in the course of rescuing them.

Now given the temper tantrum by investors since the Fed nudged rates up in December, Gillian Tett of the Financial Times reports that 2/3 of money managers expect the central bank to reverse course, and the fact that the Fed included negative interest rates in its upcoming stress tests leads them to think this might be next hat trick they try, particularly now that, as former central banker William White pointed out yesterday, 1/4 of the advanced economies are now in negative interest rate territory. The one bit of good news on this front is that Yellen was raked over the coals in House hearings earlier this week on several issues, one of them being negative interest rates.

But its utterly stunning to see this move not only being treated as a sound poilcy option, but actually being implemented. Deflation is the worst possible place to be in an economy with heavy debt levels. Economists have managed to forget the most basic lesson of the Great Depression, and tell themselves the bizarre story that putting money even more on sale will lead people to borrow and spend. Earth to central bankers: they won’t if they are worried about their future. What is needed is more demand, which means more fiscal spending and better incomes for workers, which means more labor bargaining power. Yet orthodox policymakers are deeply allergic to both ideas.

The intersection of weak institutions and poor policymaking is most acute in the Eurozone. And by “weak institutions” we mean both the governance structures of the Eurozone and the Eurobanks themselves. Even though it’s been said so often that it is virtually a cliche, the US forced its banks to clean up a good bit more than the Europeans did after the financial crisis, most notably, in making them increase their equity levels.

But there’s a deeper pathology underlying the difference in responses. In the US, for better or worse, we’ve moved more of our credit extension off bank balance sheets and into capital markets than has taken place across the pond. That means our banking system as a percentage of GDP is much smaller than in Europe. To put it another way: given the fact that each individual country is the ultimate backstop for its banks under Eurozone rules (save for extremely limited exceptions), and that Maastrict rules limit deficit spending, the big Euroobanks do not have credible backstops.

Switzerland (which is not a member of the Eurozone and hence is less constrained) was the only European country to deal frontally with the risk of its outsized banks. When it had to bail out UBS, it not only forced the bank to make an account, in public, of the specific management failures that led to the losses (a step taken nowhere else), it forced its banks to get to 19% equity levels. Period. No excuses. UBS flailed around with trying to move its headquarters to another country, which we predicted would be a non-starter (who would have them?). UBS and Credit Suisse have skinnied down considerably, with both largely exiting investment banking and retreating to their traditional business of being a safe haven for dirty money, um, being private banks.

The rest of Europe coddled its overweight, incompetent, and often miscreant banks, yet has tried to pretend that they are on their own. As readers know well, official bailouts of Ireland, Greece, and other periphery countries were actually rescues of banks. That still might have been defensible if loans had been written down, bank managements and boards purged, and shareholders wiped out (or crammed down by giving the government bailing out the banks upside at the expense of shareholders, say through options).

The current policy Rube Goldberg to pretend that banks are on their own (or more on their own than before) is not working at all well. The Eurozone has adopted some clever-sounding ideas that do not work at all well in practice. They appear to be based on the flawed Greenspanian notion that if investors are given incentives, as in they are at risk if banks get in trouble, they’ll do a better job of monitoring them and keeping them on the straight and narrow. In fact, when Greenspan admitted to a flaw in his theories, it was that of investors acting as overseers and enforcers.

Two of the too-clever-by-half Eurozone ideas were depositor bail-ins and contingent convertible bonds, called cocos. The bail-in provision, which is now in place all across the Eurozone as part of the new EU banking rules that became effective January 1, is supposed to occur only when national deposit guarantee funds fail, and those are supposed to cover deposits of up to €100,000. There is a EU-wide second layer of insurance that is being implemented in phases, but it is more fig leaf than real. We’ve mentioned that there is a slow motion bank run underway in Italy, reflecting the fact that alert large depositors (and perhaps even smaller ones) recognize that they are at risk. Anyone with an operating brain cell will move their money out in part or in whole if they think their bank is at risk. Thus bail-ins increase the odds of bank runs, the last thing a regulator wants to have happen.

The coco bonds looked like a way for banks to plug their capital holes on the cheap and had the added advantage of reducing the number of times the officialdom would have to roll up its sleeves to deal with a sick bank. Coco bonds had a variety of different provision, but the high concept was that they would morph in some manner that would bolster bank equity if certain triggers were hit. But even before coco bonds went from being darlings to dogs in 2016, some experts saw the potential for trouble. From RBS analyst Alberto Gallo in the Financial Times in 2014:

But there is more than one catch. First, cocos are highly complex. Some come with mandatory coupons, others with discretionary interest payments. All cocos, however, take losses contingent on one or more trigger events: for example, the issuing bank falling below a preset capital threshold, or a decision by regulators. The triggers can push some cocos to convert into shares, while others instead write down to zero.

There is a second catch: risk. In good times, cocos behave like a normal high-yield bond, but in falling markets they expose investors to equity-like losses and volatility. In financial jargon this is called negative convexity, or “death spiral” risk: losses accelerate as things get worse.

As we’ve pointed out, investors are spooked about Deutsche Bank, which is the most undercapitalized major bank, and its coco bonds are being whacked. This Bloomberg articles describes the cliff risk in these instruments that has investors worried:

“CoCos are a perfect pro-cyclical storm — you can sell billions of them when investors are yield-chasing and thus careless of risk,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. “In a yield-chasing stampede like that of the last few years compounded by ultra-low rates for other bank funding sources, banking-system risk is dramatically heightened.”

The yield on Deutsche Bank’s 6 percent CoCos in euros rose to more than 13 percent from 7.5 percent at the start of the year. The bank’s shares are down 40 percent in the same period…

Deutsche Bank last month posted its first full-year loss since 2008, and its shares have plunged. Credit Suisse Group AG’s shares slid to their lowest level since 1991 after the Swiss bank posted its biggest quarterly loss since the financial crisis.

We must point out that some analysts argue that the panic is overdone:

The lowest-priced CoCo bonds are now pricing in an average of three years of skipped coupons, according to analysts at JPMorgan Chase & Co. in London.

“The market is forecasting that banks will have credit losses greater than their reserves, and large enough to hit capital buffers,” said Mark Holman, chief executive officer of TwentyFour Asset Management in London. “You’d need an awful lot of bad news to justify prices being where they are now.”

And in addition to yield-hungry institution investors, retail chumps have also been buyers of cocos.

Now why have banks stocks in Europe, and as a result coco bonds, been going south in a big way? This is only a partial list of reasons:

Underlying legacy loan losses. The Eurobanks have lots of corporate loans on their books, many of which are getting worse and worse due to poor growth in the European economy. The officialdom is believed not to have been all that aggressive in making banks recognize losses, and any over-valued sick loans have to be sicker now.

New loan losses. A Reuters story estimated that losses on energy loans across Eurobanks were on the order of €100 billion. Eurobanks are exposed to other now-bad-looking credit risks, including Eastern Europe, other emerging markets, and commodity producers.

Sovereign wealth fund sales. In the last crisis, sovereign wealth funds took stakes in some floundering banks, thinking they were getting a good deal (none of these investments had a happy ending). Instead of being a source of emergency capital, Middle Eastern sovereign wealth funds have been selling assets to shore up their national budget, and historically, they were big buyers of bank stocks.

Doom loop dynamics may be returning. Italy and Portugal (although Portugal stood down on Thursday) have been pressing the Eurocrats for more spending relief, as in more ability to deficit spend. Italy cannot credibly support its “bad bank” vehicle in the abseence of more budgetary headroom. The ECB had thought it had solved the problem of the connection between sovereign debt (which Basel II rules had encouraged banks to buy) and bank solvency. But Italy’s and Portugal’s bond yields have risen….

The final set of reasons why European banks are likely to be the breaking point if economic and marker conditions continue to deteriorate is Europe’s poor policy choices. Europe is firmly dedicated to deflationary policies: an explicit policy of reducing wage rates and labor bargaining power; Germany’s continuing contradiction of not wanting to finance its trade partners, yet continue to run trade surpluses with them; and the Maastrict restrictions on deficit spending, when deficit spending is what is most needed.

A near term risk is a Chinese currency depreciation. China is spending nearly $100 billion a month defending its currency. Experts vary on how long it can keep this up. Even though China reported $3.2 trillion in foreign exchange reserves at the end of January, it may be closer to a breaking point than most observers realize. From Forbes:

…the central bank has been trading derivatives, especially forwards, to mask the decline in its currency position, much like Brazil did in 2013. The stratagem permits the PBOC, as the central bank is known, to effectively sell dollars without reporting a decrease in its holdings of foreign currency. When these short-dollar positions are unwound, as they eventually must be, China’s reserves will plunge dramatically.

And tightening of capital controls may not be as effective as they appear either:

At this moment, there has been a “surge” in China’s “errors and omissions” entry. Charles Collyns of the Institute of International Finance told the Telegraph that the increase is “ominous.” That suggests, despite everything, many in China are getting their money out through illegal channels.

According to Bloomberg’s Fielding Chen and Tom Orlik, if capital controls work, China needs only $1.8 trillion in reserves, according to an IMF formula that suggests countries hold in their reserves an amount equal to 10% of annual exports, 30% of short-term foreign debt, 20% of other foreign liabilities, and 5% of M2. At the current rate of depletion and assuming Beijing has reserves in the amount reported, the central bank can defend the renminbi for more than a year.

If, however, China’s restrictions begin to fail, then Chen and Orlik calculate the PBOC needs $2.9 trillion in reserves. In this case, China could fall below this level before the end of Q2.

A fall in the renminbi would send another deflationary pulse through financial markets, and would show up in the real economy over time through even lower demand for commodities. This has to blow back to the already fragile Eurobanks. How badly is anyone’s guess.

And we need to underscore a bigger set of issues looming behind all of these problems. With the new set of EU banking rules and gee-whiz fixes like coco bonds, the European officialdom has taken the public position that it has fixed its banking problems. And due to Germany’s anathema for having the ECB engage in anything that might be stealthy fiscal action, or in having Eurozone member states stray outside their spending limits, the Europeans are not set up ideologically or operationally to respond to a crisis, even the sort of slow-motion crisis now underway. Draghi has been a master of letting clever talk substitute for action, but it’s not clear what moves he could make if conditions devolve, particularly since faith in central bankers is on the wane and QE and further rates cuts won’t remedy the underlying pathologies.

On a much higher level, no one has been willing to confront the basis conundrum: a functioning payments system is essential to modern commerce. Bank regulators and central bankers understand that; that’s why they are so desperate to keep it working when things look dire. But the fact that a payments system is essential infrastructure and thus will (presumably) be backstopped also means it has no business being operated with few constraints by private parties. At a minimum, core payments systems functions need to be nationalized or operated like a utility, with very strict oversight and curbs on profits. But it will probably take another crisis before the political classes are willing to cross that Rubicon.

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    1. susan the other

      I agree, this is the short answer. This essay was so good. Very straight talk. It occurred to me as i read it that austerity is the cause (intended or not) of inflation in one way – because it creates too few goods. And our lack of inflation means we still have plenty of stuff to meet our demands. Extreme deprivation has probably been considered. Why else Greece? And less obviously, the credit bubble was a form of austerity because it deprived citizens of their right to government deficits. Which would have prevented our deflation-spiral now. We need to get off this seesaw of deflation caused inflation. Yves last paragraph is interesting – that we need a payments system that doesn’t rely on deflation follies. I assume this means a system that escapes the inflation-deflation circus. Nationalized utilities. This is the same medicine all private banks need because they, by the nature of being private, must compete. The irony is that the goat is always labor and wages – which should be rock solid in order to preserve economic stability.

    2. Plenue

      “(regarding gold) 6000 years of proven track record no other form of Money has, something deeply embedded in every human mind.”

      I love how goldbugs talk so much about history, sociology, and psychology while clearly have no understanding whatsoever of any of them.

      1. Knute Rife

        Exactly. The goldbugs have yet to explain why a country’s wealth should be based solely on the accident of having gold under its dirt (By that logic, Russia and South Africa should be the world’s great financial powers.). And anyone who cites Rickards….

    3. RB Houghton

      Simple – so long as you can restrict the uses they put their windfalls to.

      I think the problem for the ECB is its unwillingtness to grasp and retain the initiative. It seems to be infatuated with nationalities and democracy and not at all about central banking.

      Europe cannot heal itself without a much closer financial union.

  1. vlade

    wouldn’t it be a great irony if germans had to call on europe to save its banks in the end?
    at the same time, it would be a very sad thing, as all that suffering and sacrifices of greeks/spaniards/irish etc. was an attempt to save german (and others, to be fair) banks in the first place.

    maybe your averge german is more thrifty than your averge greek (doubt it, but let say so for the arguments sake). greek banks otoh are way less dangerous than german or french ones.

    1. visitor

      if germans had to call on europe to save its banks

      …then this would mean the entire European financial system is on the brink of collapse — and not figuratively.

      For all the slow banking run in Italy and Portugal (troubles with the BES, Novo Banco and Montepio Geral have been causing similar trepidations as in Italy), German banks, and foremost Deutsche Bank, are vastly larger, exposed to a much greater magnitude, and more interconnected.

      1. vlade

        indeed – but thats why germans could not eve hope to save them on their own. and given their exposures are often non-domestic, the risks of going boom at the wort time are bigger too…

  2. Dino Reno

    Deutsche Bank is in big trouble because of big loans to failing domestic companies like Volkswagen and loans to the Chinese to buy German industrial equipment that will never be repaid. The market is “suggesting” that none of these credits are rock solid, while the bank and officialdom are saying they are AAA. In addition to impaired assists, they are negative rate land. This is going to zero, unless we see extraordinary measures.

  3. visitor

    the European officialdom has taken the public position that it has fixed its banking problems.

    This reminds me of the infamous stress tests performed in 2014.

    We will perhaps soon see some institutions that passed the stress tests with flying colours experience “unexpected” difficulties.

  4. vidimi

    But its utterly stunning to see this move not only being treated as a sound poilcy option, but actually being implemented. Deflation is the worst possible place to be in an economy with heavy debt levels. Economists have managed to forget the most basic lesson of the Great Depression, and tell themselves the bizarre story that putting money even more on sale will lead people to borrow and spend. Earth to central bankers: they won’t if they are worried about their future. What is needed is more demand, which means more fiscal spending and better incomes for workers, which means more labor bargaining power. Yet orthodox policymakers are deeply allergic to both ideas.

    this is stunning to behold. sure, credit generally increases when the cost of borrowing is lower, but it’s not the only constraint. today, it hasn’t been the constraint in a long time. people having no positive outlook and no assets to borrow against is.

    plants need water, sunlight and nutrients in the soil to grow. the central banks’ actions are like trying to grow a plant in a dark bathtub and only ever adding water.

  5. MikeNY


    Too much money in too few hands. That is the core of our economic problem. But that is the very last thing the oligarchs will believe.

    meant as reply to vidimi

  6. craazyboy

    We need to make Bart Simpson Fed “Chief Cartoon Character”.

    Also, Bart needs to write on the blackboard, 100 times, “I will not let banks issue coco bonds which secretly make bondholders subordinate to bank stockholders. Because this will totally destroy any confidence that our government institutions are anything but partners in crime with the banking system”.

    Then, Bart…”I will not sell chalk futures because this will make me run out of dollars and chalk, and make my “errors and omissions” account get big as Homer’s butt.”

    1. craazyman

      Did Coco Chanel ever Get Doubted with This Degree of Inquisition?

      the basic problem is nobody wants to take personal responsibility.for arête and duende

      a coco bond is like being a gunfighter in a western. You quickdraw and shoot 4 times and you’ve got 2 bullets left. if you’re not a good shot, and you takke those two shots and you hit the ground near your foot and you hit a shingle on a roof 39 yards away, that’s the shooters problem.

      Why is it society’s problem if the shooter can’t hit a can on a fencepost at 25 yards. Is he drunk? is he arrogant and pretentious without true skill? Why the fuk can’t he hit the can?

      It’s not the cocos fault. It’s the shooters fault. You can’t make a financial system idiot proof. if people insist on being idiotts who can’t shoot straight then nothing can save them. there’s really a point where you just think “maybe they’re too fukking stupid to be taken seriously as a life form on planet earth”. Its not quite there yet, but it’s getting close. somebody should be able to analyze a coco bond and make a manly decision to buy or not to buy. its not rocket science.

  7. Left in Wisconsin

    I found this post frightening, especially this line:
    the Europeans are not set up ideologically or operationally to respond to a crisis, even the sort of slow-motion crisis now underway.

    How does this not end badly? For all my bitching, I do think the US political/economic system has quite a bit of flexibility, both policy flexibility and the kind of flexibility that comes from being a huge economy using the world’s reserve currency that was hugely productive for 40 post-WW2 years and so has accumulated a lot of assets that, by being sold off in a measured way, can buy a lot of time to come up with new solutions.

    But it seems impossible that there will not be a serious reckoning in Europe some time in the next 20 years that will require real political intervention (jobs programs, income supports, etc.) and impossible that European leaders and citizens will be able to rise to the task. What then?

  8. flora

    Thanks for this overview. Agree with your final para. Think the central bankers and banks won’t change until events force their hands.

  9. Lambert Strether

    Readers, just because the words “hair on fire” do not appear in the headline does not mean the post isn’t important. Exactly like private equity, you’ve got to understand these institutions and how they work.

    And Sanders supporters will want to read all the way to the end. Read that last paragraph, and think about it.

    1. Deloss Brown

      I read the last paragraph several times, and it sounds like a justification of Bernie’s ideas, and I thought it would be a refutation.

      But I am a slow learner, and I appreciate NC very much.

      At least I now know what a “coco bond” is. It’s another clever financial product.

  10. Synoia

    He warned that the only way to reduce risk is to reduce the tight coupling.

    That’s very anti-neoliberal. and involves currency controls.

  11. Bas

    I just came across these docs again, the Citi Group Plutonomy Memos, from 2005-6. Citi tried to scrub them off the web, but they are still there in downloadable .pdf. These are some scary things. If anyone is still wondering if the chaos is unintentional, they should read these. This quote is from the third link:

    What could go wrong?
    Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more ‘equitable’ share of wealth.

    Bernie IS their worst nightmare.

      1. kevinearick

        they didn’t get rid of commercial banking by accident…
        go down to the local bank that says commercial loans, and see what they ask for to get a commercial loan…pretend you are a mom and pop….
        re finance doesn’t pay for itself by accident.

  12. kevinearick

    The DNA Pressure Cooker: Meltdown

    The ruling classes compete on knowledge, and have an advantage over all other knowledge-seekers by subverting them with mythology, but labor gains more knowledge by accident than the ruling class, and this is when sovereign ignorance becomes transparent, collapsing sovereign credibility. Proprietary knowledge economies fail every time; that’s History, of counterweights. They need your genes, but don’t want you, surprise.

    No one is leaving this rock, until the problem/solution of DNA tuning is recognized. The majority, always tuning into an arbitrary narrative of History, travels so far out of line with nature, first avoiding natural selection and then capitulating at threshold, way too late, that its genes attack themselves. If you have been paying attention, all these ‘diseases’ have viral behavior in common. As does the human behavior – finance, war and infrastructure – which is clearly devolving.

    Regardless of narrative, History is a straight line, a theoretical tangent on a curve. Gossip and voyeurism is agreed upon as the past, which is then projected into the future, and peer decisions are made accordingly. America was built on the idea of employing many such tangents as a portfolio to approximate the curve, which is like driving by looking in the rear-view mirror, made in multiple dimensions.

    Frequency is a wave, and nature is a wave of information being transmitted. Whether breeding on property and money, or direct downward mutation, all treated with drugs, of one brand or another, one political religion or another, the outcome s the same, with the only difference being when the event horizon goes over the cliff. At the end of a supercycle, they all go over together.

    Of no great surprise to older cultures, the outcome is the same, a self-fulfilling destiny of natural resource liquidation, self-obsession, financial regression, war, and infrastructure collapse.

    Story Segway – So, my wife’s delusional family begrudged her for having happy genes, assuming she was delusional, and when she refused the immunization treatment for her baby, the Obamacare-assigned pediatrician assumed she was delusional, her family confirmed, and you can guess the rest, discovery confirmed by a cascade of ill-behavior, including an ICU trip for Grace, after they took possession and gave it to her anyway.

    You don’t need 50 years of public education, and a pile of forwarded event horizon debt, to conclude that isms cannot work individually or in tandem, because they are all a game of last-man-standing, in which all go over the cliff, when the future becomes the present, which it always does. And not coincidentally, that is what you see happening to their DNA, which is built upon complimentary gender bonding to correct all those mutations, which left to their own design can only melt DNA. Common sense tells you that children are the future and subverting them is prisoners dilemma, and yet the self-obsessed social engineers are trying to outsmart nuclear DNA by cloning the mitochondral DNA on the back end.

    Cloning behavior across attributes, like race and color, is not diversity. The diversity you want, to approximate the curve with tangents, is diversity of spatial recognition, perception. If you allow yourself to think, to expect the unexpected and be on the lookout, the empire bias simply serves as a reference, and your thoughts become the adjustment back to curve.

    Employing the empire as a reference point is like saying if you see an oak tree you have gone too far, and empire is the oak tree. And your line of sight is different from my line of sight. Trading the efficient stupidity of empire for the inefficient stupidity of nation/state isn’t the answer, unless you want to liquidate into insolvency.

    Step out of Freud’s multidimensional ego for a moment. You have a semi-autonomous unconscious, with scripted motor responses to stimulus on a stack of assumptions, knowledge, which can only be bypassed at threshold; you have a subconscious intermediary, which is a frequency pattern matcher to hash, initiated to expect the unexpected; and you have a conscious paying attention to events in arbitrary time on this planet. The Pavlov Swap is culture imposing its will on the individual subconscious, to expect the expected, effectively programming arbitrary stability and security with compliance, on the basis of liquidating natural resources, consumerism preached as productivity.

    If everyone starts thinking ahead, just a little bit at a time, instead of confirming the stupidity of the past, we can all get on with our lives. But make no mistake; some of us are going to get on with living. And natural resources per capita is climbing again, on demographic deceleration going over the cliff, due to the RE control mechanism caught in its own catch-22, accelerated by social engineers posing as educators.

    Machiavelli – small groups, away from the world, with a short planning stage, and the compliment, for implicit recognition. Watch cops with that frame of reference some time, and extrapolate to the algorithm implemented by Silicon Valley. Don’t be different, and if you are different, don’t assemble in small groups, especially family. Crack me up.

    Genetically, the feudalists rig their own deck with monopolies, and pay the social engineers in debt to shuffle all the decks they see, reversing DNA.

    The probability calculation itself assumes no change in probability as it is calculated, which becomes more probable as government grows in time, which itself is an arbitrary perception, chasing its own tail and spewing out symptoms, for positive feedback. As we pop false assumptions off the stack, the hash algorithm in Archimedes Screw becomes obvious, and the central banks are welded to the line. Normal is another way of saying perceived average, making decisions based upon the probability of arbitrary perception.

    Hash the fuel mix and apply oxygen; revert Archimedes Screw and place the amplifier of amplifiers on the other side. Mom and dad are the capacitor and the inductor, and the kids are the resistor bank in a power amplifier, but build whatever you like. Nature recognizes its own.

    The problem with The Law of course is that it is planned, adopted and administered with biased adjudication, rather than under the ‘veil of ignorance’ – absent self-serving, special interests. That’s what kids are all about, defying gravity. Make a list of what families buy, what others buy, and how they invest, adjusting income for time applied.

    It’s really not rocket science, folks. The Story is genetic meltdown; how much stock the bank buys back is noise; and the misery of judgment is entertained by its depravity of liberty, the disease of prisoners dilemma.

    How is a real estate bank, which profits on a ponzi of willfully ignorant consumers, rolling arbitrary debt over from generation to generation, while bleeding nature dry, going to correct willful ignorance?

    1. Fiver

      One of your better efforts. Question: Do you take questions?

      Second question: who ‘social engineered’ you so poorly you remember and relate it with such evident zest after all those years? What did they do, exactly?

  13. Ke

    Frankenstein isn’t coming; he’s already here. Genetically, women are far easier to replace, he has all the eggs he needs, and he is ready to scale up. He can replace most men, but not the ones he needs, yet, unless he cuts research short and begins back in time. Crowdsourcing is getting further behind this iteration of fascism, not ahead. AI is not your problem. Take a look at the earliest time you can harvest eggs.

  14. notabanker

    This is a fantastic post, really thought provoking.

    “In tightly-coupled systems, and our system of large interconnected global banks and high levels of cross-border capital flows is a tightly-coupled system, measures intended to reduce risk typically wind up increasing them because no one really understands how it operates. He warned that the only way to reduce risk is to reduce the tight coupling.”

    This is really it in a nutshell, at both a macro and micro level. Same concept that is applied to the interconnected nature of banks applies within the banks themselves. The layers upon layers of regulatory and self imposed risk mitigation on these complex processes and systems is what will kill the banks and the system. It is becoming massively more inefficient by the day, and the ‘black swan’ event is merely a symptom of the problem. So many potential points of failure that no one can really grasp. Moral and ethical arguments aside (however extremely important they are) the sheer mathematical probability that some thing will break and cascade through the system with completely unpredictable results is a certainty.

    Some thoughts on where to start:
    – Derivatives – forget central clearing. Force the central banks to be a counterparty to every transaction, and they can only be written in the currency they issue. If you are going to play in the casino, they are the house. And they can never lose, ‘cuz they can always print more.
    – HFT – Ban it. No one knows how these algos are going to react in crisis. It can all be over in a few minutes, and no one will ever be able to piece it back together.
    – Retail deposits – Glass Steagall. Ring fence them. Strip them away from capital markets.

    I agree that the likeliest candidate for the cracks to appear is in the eurozone, just for the simple fact they do not have the sovereignty nor political will to back the currency. Once the cascade starts it will be every man for themselves, and the Euro is toast.

  15. Knute Rife

    If the officials were ER doctors, they’d slap a band-aid on a severed leg and say, “All better.”

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