German Chancellor Merkel says that bailouts here to stay

Bloomberg reports that German Chancellor Angela Merkel observed that bailouts are here to stay.

This is an interesting observation as it assumes that the Swedish model for handling a bank solvency led financial crisis will never be implemented and that the EU will forever be pursuing the failed Japanese model.

Regular readers know that under the Swedish model banks are required to absorb the losses on the excess debt in the financial system.  If the losses are absorbed, then why would bailouts be necessary?

The primary purpose of bailouts is to protect banker bonuses.

For example, look at the Greece bailout.  The cash did not go to Greece to invest in rebuilding its economy.  Rather, the cash went straight to the creditor banks.

Your humble blogger has been pointing out for some time that modern banking systems are designed to protect the real economy from the excesses in the financial system.  Modern banking systems can do this because of deposit insurance and access to central bank funding.

With deposit insurance and access to central bank funding, modern banks can have a negative book capital level and continue to operate and support the real economy for years.

Modern banks can do this because the deposit insurance effectively makes taxpayers the 'silent' equity partners of the banks.

Of course bankers do not want to acknowledge this capability because in exchange for taxpayers being the silent equity partners comes the requirement that banks retain 100% of their pre-banker bonus earnings until such time as bank book capital levels have achieved regulatory minimums.

German Chancellor Angela Merkel told her domestic critics that bailouts are here to stay, even as her finance minister warned against placing too much faith in the European Central Bank’s ability to stop the crisis. 

Merkel made a foray away from crisis fighting today as she traveled to a traditional political gathering in a packed beer tent in southern Germany to confront anti-bailout critics in her government coalition. Countries such as Greece “deserve our solidarity” as long as they meet commitments for overhauling their economies, she said. 

“We need Europe, but we need a strong Europe,” Merkel told members of her Bavarian Christian Social Union sister party in the town of Abensberg, northeast of Munich. “We can’t take up so much debt that tomorrow we won’t have anything left and we’ll be at the mercy of the financial markets.” 

Bailouts are a sign that Germany is at the mercy of its bankers.

The appearance at a Bavarian political meeting offered a glimpse of how euro-crisis politics will steer public discourse as Germany heads into an election year. 

With markets awaiting details this week of a bond-buying plan from the ECB, Finance Minister Wolfgang Schaeuble said that Europe shouldn’t raise “false expectations” over the central bank’s ability to stem the turmoil, leaning on indebted nations such as Italy and Spain.

Merkel also maintained pressure on Greece, saying the country must fulfil the terms of its bailouts in return for “solidarity,” while austerity programs undertaken in Spain and Portugal “require an effort.” 

“We have to press for reforms in other countries even if they sometimes say we’re hard-line,” Merkel said. “It’s not enough just to keep muddling through. But I also say that in such a difficult phase these countries deserve our solidarity and that we root for them to overcome their difficulties.”

To overcome their difficulties, each of these countries should follow Iceland's lead and adopt the Swedish model.  Iceland forced the banks to absorb the losses on the excess debt.  Not only can Iceland issue investment grade debt now, but it also has an economy that is growing.