Wednesday, May 15, 2013

Almost 6 years after financial crisis began, consensus emerging there is no sovereign debt crisis in EU

In his Reuters Macroscope post, Pedro da Costa explains how a consensus is emerging that the EU is not facing a sovereign debt crisis, but rather a bank solvency led financial crisis.

This is very important because the cure for a bank solvency led financial crisis is well known: adopt the Swedish Model and require the banks to recognize upfront all their losses on the excess private and public debt in the financial system.

Modern banks are designed to absorb these losses and continue operating and supporting the real economy.  Banks can do this because of the combination of deposit insurance and access to central bank funding.  When banks have low or negative book capital levels, deposit insurance effectively makes the taxpayers the banks' silent equity partner.
Instead, argues Blyth, it is merely a sequel to the U.S. financial meltdown that started, like its American counterpart, with dangerously-indebted risk-taking on the part of a super-sized banking sector.
In a new book entitled “Austerity: The history of a dangerous idea,” Blythe writes that sovereign budgets have come under strain primarily because taxpayers of various nations have been forced to shoulder the burden of failed banking systems.
Taxpayers have been forced to shoulder the burden because they are being called on to bailout the banks when the banks are perfectly capable of rebuilding their book capital levels through retention of future earnings.

Taxpayers have also been forced to shoulder the burden because the banks have not been required to recognize the losses on the excess debt in the financial system.  As a result, the taxpayers and the real economy are called on to make the debt service payments on this excess debt.  This diverts capital that is needed for reinvestment, growth and support of the social contract.
"The way austerity is being represented by both politicians and the media – as the payback for something called the ‘sovereign debt crisis,’ supposedly brought on by states that apparently ‘spent too much’ – is a quite fundamental misrepresentation of the facts.  
These problems, including the crisis in the bond markets, started with the banks and will end with the banks. 
The current mess is not a sovereign debt crisis generated by excessive spending for anyone except the Greeks. For everyone else, the problem is the banks that sovereigns have to take responsibility for, especially in the euro zone. That we call it a ‘sovereign debt crisis’ suggests a very interesting politics of ’bait and switch’ at play."
No surprise that bankers and politicians would engage in 'bait and switch'.  After all, the policies that have been adopted were designed to protect bank book capital levels and banker bonuses at all costs.

This has meant putting the bankers ahead of honoring the social contract or serving the best interests of the taxpayers.
So why all the misunderstanding? Why has the crisis become conflated with a government debt problem in the public imagination? 
According to Blythe, this is a convenient way for Wall Street to again saddle the state with massive banking sector losses.
Please re-read the highlighted text as Blythe it is simply marketing by Wall Street to avoid the consequences of its losses and to keep its bonuses flowing in an uninterrupted fashion.
The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on how you count it, between 3 and 13 trillion dollars. 
Most of that ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis.
Please re-read the highlighted text as Blythe provides an estimate of how much money the bankers should be reimbursing governments and taxpayers for as a result of their management of the banking system.

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