FacebookTwitterRedditEmail

Another One Bites the Dust

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

More articles by:

Marshall Auerback is a market analyst and a research associate at the Levy Institute for Economics at Bard College (www.levy.org).  His Twitter hashtag is @Mauerback

bernie-the-sandernistas-cover-344x550
Weekend Edition
July 19, 2019
Friday - Sunday
Rob Urie
The Blob Fought the Squad, and the Squad Won
Miguel A. Cruz-Díaz
It Was Never Just About the Chat: Ruminations on a Puerto Rican Revolution.
Anthony DiMaggio
System Capture 2020: The Role of the Upper-Class in Shaping Democratic Primary Politics
Andrew Levine
South Carolina Speaks for Whom?
Jeffrey St. Clair
Roaming Charges: Big Man, Pig Man
Bruce E. Levine
The Groundbreaking Public Health Study That Should Change U.S. Society—But Won’t
Evaggelos Vallianatos
How the Trump Administration is Eviscerating the Federal Government
Pete Dolack
All Seemed Possible When the Sandinistas Took Power 40 years Ago
Ramzy Baroud
Who Killed Oscar and Valeria: The Inconvenient History of the Refugee Crisis
Ron Jacobs
Dancing with Dr. Benway
Joseph Natoli
Gaming the Climate
Marshall Auerback
The Numbers are In, and Trump’s Tax Cuts are a Bust
Louisa Willcox
Wild Thoughts About the Wild Gallatin
Kenn Orphan
Stranger Things, Stranger Times
Mike Garrity
Environmentalists and Wilderness are Not the Timber Industry’s Big Problem
Helen Yaffe
Cuban Workers Celebrate Salary Rise From New Economic Measures
Brian Cloughley
What You Don’t Want to be in Trump’s America
David Underhill
The Inequality of Equal Pay
David Macaray
Adventures in Script-Writing
David Rosen
Say Goodbye to MAD, But Remember the Fight for Free Expression
Nick Pemberton
This Is Heaven!: A Journey to the Pearly Gates with Chuck Mertz
Dan Bacher
Chevron’s Oil Spill Endangers Kern County
J.P. Linstroth
A Racist President and Racial Trauma
Binoy Kampmark
Spying on Julian Assange
Rose Ramirez – Dedrick Asante-Mohammad
A Trump Plan to Throw 50,000 Kids Out of Their Schools
David Bravo
Precinct or Neighborhood? How Barcelona Keeps Rolling Out the Red Carpet for Global Capital
Ralph Nader
Will Any Disgusted Republicans Challenge Trump in the Primaries?
Dave Lindorff
The BS about Medicare-for-All Has to Stop!
Arnold August
Why the Canadian Government is Bullying Venezuela
Tom Clifford
China and the Swine Flu Outbreak
Missy Comley Beattie
Highest Anxiety
Jill Richardson
Weapons of the Weak
Peter Certo
Washington vs. The Squad
Peter Bolton
Trump’s Own Background Reveals the True Motivation Behind Racist Tweets: Pure White Supremacy
Colin Todhunter
From Mad Cow Disease to Agrochemicals: Time to Put Public Need Ahead of Private Greed
Nozomi Hayase
In Crisis of Democracy, We All Must Become Julian Assange
Wim Laven
The Immoral Silence to the Destructive Xenophobia of “Just Leave”
Cecily Myart-Cruz
McDonald’s: Stop Exploiting Our Schools
Kollibri terre Sonnenblume
Our Veggie Gardens Won’t Feed us in a Real Crisis
CounterPunch News Service
A Homeless Rebellion – Mission Statement/Press Release
Louis Proyect
Parallel Lives: Cheney and Ailes
David Yearsley
Big in the Bungalow of Believers
Ellen Taylor
The Northern Spotted Owls’ Tree-Sit
July 18, 2019
Timothy M. Gill
Bernie Sanders, Anti-Imperialism and Venezuela
W. T. Whitney
Cuba and a New Generation of Leaders Respond to U.S. Anti-People War
FacebookTwitterRedditEmail