Many years ago when I lived in London I was walking by the Thames one morning, when I came across a gentleman who had obviously fallen down on his luck. To make his morning worse, he had obviously also, fallen over. He had a large bloody bruise right in the middle of his forehead.
This man would walk a few paces, then stop and face the imposing house fronts of Thames-side Chiswick and say with a small bow, “Thank You Chiswick.” He would walk on, seemingly lost in conversation with himself, then turn again and politely, but with an expression full of puzzled outrage and bitter irony, cry out to the house fronts once again, “Chiswick! Thank You!”
He was having, what I came to know as, ‘a Chiswick morning’. I’m having one now.
And here is why.
First, please consider this reaction to the ECB mega-bail-out, from economists working for Morgan Stanley
“If the emergency liquidity for the periphery is not complemented by aggressive austerity measures, the underlying solvency problems could continue to fester and eventually spread to the core.”
And this one from Klaus Baader economist at Societe Generale, “Without fiscal consolidation all of this is for naught because public sector finances in many states are unsustainable and need to be consolidated,”
Now I agree with both these statements in so far as we do have too much debt and will have to amputate it.
BUT – my Chiswick morning comes from the distressing mixture of obvious truth and appalling lies that both these statements contain.
Emergency liquidity for ‘the periphery’. The what? The sentence is meant to make you assume that he means Greece and Portugal, of course. You know, populated with those awful peripheral people. But actually the ’emergency liquidity’ as he terms it, is for Banks. Those banks in the ‘periphery’ countries? Well actually no. If a few Greek banks were to go down so what. Except they are owned by, or owe vast sums to, – BIG important banks like Morgan Stanley and Soc Gen. which mustn’t be allowed to collapse.
Why do you think the French stock market has rallied nearly 9% this morning!! Because they are just so very happy for the Greeks? It’s because at least one major French bank (Credit Agricole and/or Soc Gen itself ) would have gone splat! if Greece had gone down. Credit Ag. from debt exposure and Soc Gen from CDS bets ( I think, but I’m not sure about Soc Gen. – difficult to tell for sure) .
Then the corker – The financial doctor dispenses his diagnosis and wisdom. The cure, ” aggressive austerity measures” . They are, he intones, the only cure for the those suffering from, “underlying solvency problems…” Which , he warns, if left, “to fester” could “spread to the core”.
I’m tempted to hit this man.
The BANKS have had ‘underlying solvency problems’ for two years. But not one word has been said by the banks’ experts about that. Oh, no! The banks have a liquidity shortage – and it is no doubt our fault – it is only the public who have a solvency problem. We must be subjected to financial leaching – “aggressive austerity measures”. Not the banks, though. No. No austerity for them AT ALL. Bonuses, in fact, are essential for them.
Their debts, apparently, are much better ‘left to fester’. Much, much better. “Trust me I’m a banker. I know about these things.” And what kills me is that their festering debts ARE the debts rotting at the heart of public finances – now that we have bailed them out for a THIRD TIME.
‘It might spread to the core’. You might think he means Germany and France. WRONG. He means THE BIG BANKS. How can I know what he means. Surely a terrible piece of arrogance on my part. Well, actually no. It is the big banks who are exposed to the debts. This is a fact. Also a fact is that those exposed banks would have imploded if Greece or Portugal or Spain had fallen. Germany wouldn’t have fallen. It’s banks might. French banks certainly would have. Would French people or French culture have died? I think not.
In bankers minds, the Banks are the ‘core’. While we , the people, and our national life, are merely ‘the periphery’. We are the tommies to be sent to slaughter to make good on the general’s Big Push’.
‘It will be all for naught’ if we don’t get consolidation of public finances say Mr Soc Gen. mouth-piece. Translation – having saddled public finances with our debts we must get people to forget that, and insist that prudence and ‘concern’ dictate that we bankers, ‘with a heavy heart and paternal regret’ of course, must eviscerate all other parts of public spending.
Golem you say "It is the banks who are exposed to the debts. "
But could " core " not also refer to nation states/ governments own exposure to the banks via the bond markets used to juggle their spiralling debts?
Both banks and nations have bought debt from other nations and from banks i those other nations. Both banks and nations would lose money if either the banks or the nations whose debt they bought were to default.
Plus when banks become so large their assets outstrip available cash in their host nation then that bank's debt becomes a national liability, Nations have come to feel the debts of banks that large, are to be taken onto the public purse.
Is this what you mean?
yes…but beyond that,if european economic policies are based on growth and banks and nations are allin debt to each other, doesnt that mean that debt value has to grow ? like any other asset ? In order to pay the interest back ?
I guess I was wondering if this money pumped in was to make the debt worth more….ie the government bonds worth more…and whether that was why the ECB are buying them up after having jacked the prices back up with the 750 bn…so, uh, the government writes off some debts, the banks "own" a larger % of nations "assets " and its easier to massage their values in the future, because …it was the banks that lent the money to the governments in the first place…
so its in the governments interests to hand control of their own "debt spiral" to the banks.
does that make any sense?
i mean somewhere its possible that governments might have banks over a barrel here…either you ( the banks) bail us ( the government) out or we force you to flush out your dead assets and half of you go bust….
p.s. referendum from guardian website here as usual struggling to understand whats going on….
Golem, yours is perhaps the best informed and certainly the most honest commentary on the banking and political shenanigans of the West (and beyond) – and now with humour two!
I and a growing number of others really look forward to receiving your instalments.
I mean't 'too'.
Gustaf,
You are two/too kind. Seriously, thanks.
Andrew,
We're all struggling, believe me.
In my opinion you have seen the ugly and essential problem but not the answer.
As your instinct told you all that debt means we need some sort of growth to pay off the interest. Bingo.
We had a financial problem. Or rather the banks did. We borrowed, incurred MORE debt in order to lend them the cash to cover their debts.
They still have their debts and, therefore, the interest to pay on them. Although thanks to us they have not defaulted on payments. But to this debt we have now added our own, new debt and the interest on that also.
As you realised we will need to earn more than before now that we have taken on more debt.
Keynesian stimulus – or any kind of stimulus spending for that matter – is simple. Whatever you put in, in stimulus MUST make you more in return than the cost of borrowing it. Otherwise you have just made yourself poorer and in worse danger than before.
You can measure this. You can measure how much deficit/debt spending is going on and how much growth in GDP you are getting. If it dips below one € return for every € of debt taken on then you are going to drown and die. It's called a debt spiral.
We are in it.
We are because the stimulus euros and pounds and dollars we have been putting in have not been creating growth and therefore return. That money has been going to fill in a black hole in bank balance sheets.
They are holding 'assets' at false values. They cannot do this for ever. As assets blow up and get forcibly valued, the banks have to replace that destroyed and vanished value with real value,- That's where our euros come in. That, and the banks can keep failing debts from blowing up as long as they can keep a minimal cash flow going.
We are not increasing the value of our bonds by buying them. We are devaluing the money we are buying them with.
What we are doing is 'buying' bonds that can;t find any other buyer. By doing so we give the bank the 'value' of whatever we paid for them. But do they really have that value? Only if we could turn around and sell them to somebody else. But we can't can we. SO at the moment they are worthless. The gamble, the whole entire stupid 'policy' is for CB's to buy stuff that is worthless in today's market, give the banks we bought it from real cash so they can survive financially, and HOPE that as a recovery is conjured our of debt, that the value of the assets we bought, returns so we can sell them again.
If it doesn't return we are dead.
If it doesn't return before we can no longer service the debt we took on to buy them, we are dead.
If the banks don't recover after this bail out but need more, we are dead.
If people say bite me and don't accept severe austerity measures, we are dead.
If the speculators (big banks) think more money is to be made going after weaker countries, we are dead.
I could go on.
thanks for that.
the ill informed question i was trying to ask is:
Is the reason why the 750bn + govt bond purchase is the preferred solution because nations ( aswell as banks) are holding assets worth alot less than their notional value
and governments want to atall costs avoid the solution you referred to in an earlier post —the German Finance Minister Wolfgang Schaeuble proposing to introduce a 10% cut in asset values—- because so much of nations wealth is wrapped up in these assets , and ( second question) given that banks are buying government bonds, what " assets" are they using to pay for them — i mean swapping them for?
thanks for your feedback
Andrew,
Sorry its taken me so long to understand your intended question. But we're getting there.
I think what you might be imagining is that in the past few years national central banks may have 'bought'/accepted as collateral 'assets' from their nations banks which are now worth very little. And don't want those 'assets' to be exposed.
If this is what you are imagining then yes, this is likely to be true. How much if their problem it is depends on the country.
The Fed for example has 'bought' about $1 Trillion worth of mortgage backed paper and debt from Fannie and Freddie. When the FED bought it it was at face value and not worth anything like that even then. That paper has been declining in value ever since. Today Fannie Mae came back for another $8 billion bail out after making a loss in just this quarter of $13b. Same time last year they lost $25B. So a trillion dollar bail out has decreased losses from 25 to 13B – Oh yea!
In the UK our debts are not just assets but investment direct in banks and a huge insurance scheme.
But governments buying these assets or accepting them as collateral doesn't protect them or increase their value. It just hides them. It gives the banks some place they can still get a lone. The ECB is now doing the same for both the Central Banks and ordinary banks.
So both CB's and the ECB are filling up with paper that isn't worth much and can't be sold. In addition all the banks have to pay the interest on all the money they are borrowing. And if they are increasing the total money supply will face devaluation of their currency and their credibility.
Your second question is simpler. Banks are buying government bonds with generally their own debt. IE a loan they made on a mortgage or a security they bought which is itself based on loans of some kind.
Greek banks bonds are virtually junk. The Greek central bank has been accepting that junk. Now Fitch has, and Moody's is going to, downgrade Greek Sovereign debt to junk. Partly because the CB is so stuffed full of junk paper but also partly because the nation is still felt likely to default or reschedule its debt. Despite the bail out.
Banks 'assets' are their loan book. That means the income that will flow back from those loans. Of course if the loans were poor there may not be any flow in the future. This is what everyone is lying about.
Hope this is helping. If not, keep asking. Maybe I need to start from the beginning and write from the ground up of this crisis. I just don't want to bore people.
The way I see it, the countries that make up Europe can either all go down separately or all go down together. I don't think that there are any other choices.
We simply do not have any other choice but stick together. Perhaps we have all been manipulated into this situation, but now we are here, we have no other reasonable choice
Hello Rob,
I agree with you about sticking together. I am very much of the stick together camp. BUT why do you think the only choice for sticking together is to bail out the banks and be their gimps together?
We could for example refuse to bail them out – together. We could force the banks and other financial institutions to mark the assets to market value – together. We could force those who made bad loans to pay for their own loses – together.
It is a false choice you present. It is not bail out together or cut the weak loose. We could face our losses and clear our financial system of its debts together.
Might this not be a better thing to do together than roll over and do tricks for the bankers together?
Hey Rob,
I re-read what I posted and it comes across as more aggressive than I meant. Sorry. Long day.
Your essential point of solidarity is key.
GOLEM "Banks are buying government bonds with generally their own debt"
well, thats what i'd assumed and tried to say.
If the german chancellor wants to devalue or burst assets he also at same time devalues the national debt but if the debt is the main trading mechanism and its value also its own/only insurance value he surely devalues the entire economy/market – which doesnt work if its noit done by everyone at the same time – hence everyone at the same time propping up…..and as i ( tentatively) understand it the knock on risks from greece it that every eurozone country's govt has to admit that they are holding a busted flush and waiting for a sucker to come to the table ( as it were )- which they aint willing to do – hence the bank put more chips in + bought abit of the government debt out temporarily to keep them at the table ( as it were)
but as you have been insisting for years if the ground rules dont change, the behaviour and reflex behaviour doesnt
because the essential maintaining lie – that debt – or the debt market – ( same thing) has to grow for an economy to be healthy – is still maintained.
It feels wierd even typing that because it doesnt make any sense..
But thats the logic ( as i see it ) thats being sold to the public and the market and the gov'ts…if I'm wrong please correct me.