Markets in summer of 2012 face an 'eerie echo of 2008'

In a Daily Mail article, the retiring Head of the World Bank, Robert Zoellick, observed that the financial markets are facing a rerun of 2008.

To regular readers of this blog, this is no surprise.

The choice by the EU, UK and US of the Japanese model over the Swedish model for handling a bank solvency led financial crisis meant that bank solvency would not be addressed and that we would get a sovereign debt crisis too.

For new readers, the Japanese model is built on the flawed idea that preserving bank book capital levels is necessary for both maintaining confidence in the banking system and for banks to extend loans to support the needs of the real economy.  This blog has spent considerable amounts of time debunking this idea including highlighting how the only beneficiaries are the bankers who collect their bonuses.

The Swedish model is built on the proven idea that banks in a modern financial system with deposit guarantees and access to central bank funding can and should absorb all of the losses on the excesses in the financial system today.  Subsequently, the banks can rebuild their book capital levels through retention of future earnings and stock sales.  The Swedish model is also known as Wall Street Rescues Main Street.

This blog has spent considerable amounts of time showing how this idea has worked since it was first implemented by the FDR Administration to, in the words of the NY Fed, 'break the back of the Great Depression'.

The head of the World Bank yesterday warned that financial markets face a rerun of the Great Panic of 2008. 

On the bleakest day for the global economy this year,  Robert Zoellick said crisis-torn Europe was heading for the ‘danger zone’. 

Mr Zoellick, who stands down at the end of the month after five years in charge of the watchdog, said it was ‘far from clear that eurozone leaders have steeled themselves’ for the looming  catastrophe amid fears of a Greek exit from the single currency and meltdown in Spain. 

The flow of money into so-called ‘safe havens’ such as UK, German and US government debt turned into a stampede yesterday.  In Berlin the two-year government bond yield fell below zero for the first time, with the bizarre result that jittery international investors are now  paying – rather than being paid – for lending to Germany. 

There was a raft of dismal economic news from around the world, with manufacturing output falling in Britain and Europe, unemployment jumping in the eurozone and America, and fast-emerging economies such as Brazil and China showing signs of running out of steam.... 

Mr Zoellick warned that the coming months could be as bad as the collapse of US investment bank Lehman Brothers in 2008. 

He said: ‘Events in Greece could trigger financial fright in Spain, Italy and across the eurozone. The summer of 2012 offers an eerie echo of 2008. 

‘If Greece leaves the eurozone, the contagion is impossible to predict, just as Lehman had unexpected consequences.’ 

Fears are mounting that Spain will be crippled by its banking sector and will be the next domino to fall. 

Mr Zoellick said: ‘Eurozone leaders need to be prepared to recapitalise banks. In the eurozone, the guarantees of some national sovereigns are unlikely to be sufficient and only that of the “euro-sovereign” will suffice.  

‘It is far from clear that eurozone leaders have steeled themselves for this step. Eurozone leaders need to be ready.  'There will not be time for meetings of finance ministers to discuss the outlook and debate the politics. 'In panicked markets, investors flee to safe assets, sparking other flames.’  

Yesterday investors scrambling for lifelines piled into German, US and UK government debt.Not only did the German two-year bond yield fall below zero for the first time, but also the yield on ten-year UK gilts – the benchmark borrowing cost for the British Government – hit a record low of 1.44 per cent.  

The yield on the equivalent US treasuries fell to 1.46 per cent – the lowest in over 200 years of records.  

‘People’s objective is the return of their capital, not the return they get on their capital,’ said Sam Hill, a strategist at Royal Bank of Canada.

It is still not too late to adopt the Swedish model with ultra transparency.

My question is when will the German taxpayer recognize that this is the solution that doesn't require them to pay for bailing out the excesses in the EU?