FacebookTwitterGoogle+RedditEmail

Another One Bites the Dust

by MARSHALL AUERBACK

It might seem strange to invoke Freddie Mercury and Queen in the context of the eurozone, but it’s the first thought that springs to mind, as Brussels and the increasingly hapless ECB, continue to mismanage their way to financial and economic catastrophe. Yesterday, there were sigs that the Spanish plan to recapitalise Bankia (which came with the implied backing of the ECB’s balance sheet) introduced a potential way out of the eurozone’s metastisizing banking crisis. Sadly, it’s another idea which will never get off the bulletin board, as the ECB bluntly rejected any proposal to use its balance sheet to indirectly fund Bankia, the troubled Spanish lender

So we’re back to floundering and the markets are reacting accordingly. What most investors, experts, and policy makers fail to realize is that this bank run is not simply a Greek problem, which will cease if and when Greece is thrown out of the euro zone. If one looks at the Target 2 balances, the ELA, and the ECB’s lender of last resort facilities, it’s clear that this has extended into all of the periphery countries, including Spain and Italy. It may well end with Germany’s banks effectively serving as the deposit base for all of Europe. See this chart,courtesy of Gavyn Davies

Perversely, the ECB and the European authorities acknowledge none of this and seem to be doing nothing about it. At least not publicly. They are like ostriches with their collective heads in the sand. If anything, “tough talk” from some of them may be escalating the bank run, rather than restoring confidence.

All of the recent talk about euro bonds, fiscal union and higher capital adequacy buffers for the banks are fine in their own right. But they do not deal with the immediate problem of deposit flight. In theory, of all the financial maladies that exist, the one with which the world has the most experience and therefore has developed the most effective tools to address is a bank run. And the experience of the US in the Great Depression illustrates that deposit insurance is a proven cost-effective way of limiting downside risk in a financial meltdown. Bank runs are liquidity problems, not solvency problems. This is important because insolvent institutions rarely fail as long as they are liquid, which generally comes through the provision of the central bank’s lender of last resort facilities.

It is not necessary to restore the solvency of an institution when a bank run develops and incur all the trouble and expense that this entails. Arguably, on any honest accounting of America’s own Systemically Dangerous Institutions, they could well be insolvent, but there are no runs here because the system is backed by a robust system of deposit insurance via the FDIC. All one need do is reassure depositors that they can get their money out of the bank whenever they like. And paradoxically, that backstop makes it less likely that they will participate in a deposit run Moreover, keeping deposits in a bank eliminates the need to liquidate the asset side of the balance sheet at fire sale prices. Even a normally solvent institution can become insolvent if it were forced to liquidate its assets too rapidly.

It is important to recall that central banks were not created to control inflation. They were created to prevent the bank runs that were so catastrophic for capitalist economies in the past. For all of its protestations to the contrary, the ECB has provided this backstop when catastrophe has loomed in the eurozone, but they have done so in a very reticent manner, undermining the effects of their action by publicly proclaiming each program to be absolute the last. So in effect, their “bazooka” becomes no more effective than a water pistol. This is encouraging the bank runs since people logically assume that their may be no one acting as the ultimate guarantor of the eurozone’s solvency.

And let’s be clear: in agreeing to the rules of the euro all members have implicitly committed to this responsibility of the ECB. Even Berlin! The fact the ECB is doing it clandestinely and via such gimmicky programs earlier such as the LTRO to such a vast extent shows that the ECB at some level knows this. Indeed, It may be that the LTRO scheme was hatched precisely because there were signs that the deposit run was in fact spreading to Italy and Spain in the second half of 2011.

But so long as there exists a healthy market skepticism that a strong supranational central bank will provide unlimited lender of last resort facilities to its weaker constituent parts, and so long as the ECB, and certain national central banks, continue to act clandestinely with a lot of threatening hard-line public talk, the runs will continue and the crisis will intensify.

Contrary to what the Germans are now indicating, a eurozone wide system of deposit insurance does NOT require the Germans guaranteeing the obligations of the Greek, Spanish, Portuguese, and Italian governments. This can and should be done by the ECB, as it is the issuer of the euro. It’s also in Germany’s massive interests to have these costs born by the central bank, rather than tainting its own credit rating via persistent bailouts of the eurozone’s weaker constituent parts. Because at the end of the day, Germany is a user of the currency as well and is trapped in the same roach motel as the Italians and the Spanish, even if it occupies the penthouse suite.

MARSHALL AUERBACK is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com

MARSHALL AUERBACK is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com

More articles by:
June 29, 2016
Diana Johnstone
European Unification Divides Europeans: How Forcing People Together Tears Them Apart
Andrew Smolski
To My Less-Evilism Haters: A Rejoinder to Halle and Chomsky
David Rosen
Birth-Control Wars: Two Centuries of Struggle
Jeffrey St. Clair
Noam Chomsky, John Halle and Henry the First: a Note on Lesser Evil Voting
Sheldon Richman
Brexit: What Kind of Dependence Now?
Yves Engler
“Canadian” Corporate Capitalism
Lawrence Davidson
Return to the Gilded Age: Paul Ryan’s Deregulated Dystopia
Priti Gulati Cox
All That Glitters is Feardom: Whatever Happens, Don’t Blame Jill Stein
Franklin Lamb
About the Accusation that Syrian and Russian Troops are Looting Palmyra
Binoy Kampmark
Texas, Abortion and the US Supreme Court
Anhvinh Doanvo
Justice Thomas’s Abortion Dissent Tolerates Discrimination
Victor Grossman
Brexit Pro and Con: the View From Germany
Manuel E. Yepe
Brazil: the Southern Giant Will Have to Fight
Rivera Sun
The Nonviolent History of American Independence
Adjoa Agyeiwaa
Is Western Aid Destroying Nigeria’s Future?
Jesse Jackson
What Clinton Should Learn From Brexit
Mel Gurtov
Is Brexit the End of the World?
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Doug Johnson Hatlem
Alabama Democratic Primary Proves New York Times’ Nate Cohn Wrong about Exit Polling
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
Stephanie Van Hook
The Time for Silence is Over
Ajamu Nangwaya
Toronto’s Bathhouse Raids: Racialized, Queer Solidarity and Police Violence
June 27, 2016
Robin Hahnel
Brexit: Establishment Freak Out
James Bradley
Omar’s Motive
Gregory Wilpert – Michael Hudson
How Western Military Interventions Shaped the Brexit Vote
Leonard Peltier
41 Years Since Jumping Bull (But 500 Years of Trauma)
Rev. William Alberts
Orlando: the Latest Victim of Radicalizing American Imperialism
Patrick Cockburn
Brexiteers Have Much in Common With Arab Spring Protesters
Franklin Lamb
How 100 Syrians, 200 Russians and 11 Dogs Out-Witted ISIS and Saved Palmyra
John Grant
Omar Mateen: The Answers are All Around Us
Dean Baker
In the Wake of Brexit Will the EU Finally Turn Away From Austerity?
Ralph Nader
The IRS and the Self-Minimization of Congressman Jason Chaffetz
Johan Galtung
Goodbye UK, Goodbye Great Britain: What Next?
Martha Pskowski
Detained in Dilley: Deportation and Asylum in Texas
FacebookTwitterGoogle+RedditEmail