01/20/12 Los Angeles, California – Last week, Spain and Italy were able to offload 22 billion euros worth of debt. This quieted investors’ fears. Newspapers reported that calm and confidence had returned to the markets. Lenders and borrowers breathed more easily. Bankers put their feet up. Apparently, no major bank in Europe was so far underwater that the European Central Bank couldn’t bring it to the surface. None had its lungs so full of bad debt that the ECB cannot breathe life into it.
Then, on Friday, S&P downgraded several European nations’ debt. This brought the debt of Europe’s stabilization fund, the EFSF, into doubt too. Suddenly, Europe was gurgling again.
Mario Draghi, head of the European Central Bank, wondered on Tuesday if the ratings had any value. After all, he had given the banks 489 billion euros in December. A lack of cash will no longer bring them to grief. Then, what will? That is, of course, what we will find out.
The ECB is scheduled to relax its bungee collateral requirements. The bank will now lend against used cars and day-old bread. But Draghi suggested that he had no intention of following America’s Fed in its irresponsible “quantitative easy” path. Instead of buying the bonds directly, he and the banks will collude to defraud the public. The ECB will pretend to be in control of the situation. The banks will pretend to be solvent.
The conceit of modern public finance is that people with good political skills can do a better job of deciding which banks are solvent than the marketplace. ‘Raw capitalism,’ is just too impulsive, they claim. It makes hasty decisions, often throwing out the baby with the bath water, and the bathtub too. By contrast, wise bureaucrats keep their wits about them, even in a crisis.
The Financial Times is running a series it calls “the Crisis in Capitalism.” The writers claim capitalism needs adult supervision. Samuel Brittan, for example, says it “requires…the use of monetary and fiscal policy…” to keep it doing what it is supposed to do. Where’s that? He thinks he knows. It is “a means to freedom and prosperity, not an end itself.”
We disagree on both points. Capitalism could care less whether people are prosperous or poor. As to fiscal and monetary policy…he presumes settled the very point that is at issue — whether central planning, by bureaucrats, improves market outcomes.
Last Thursday, the US Fed helped to resolve the doubt we never had. It released records of its internal discussions in 2006, when the US housing and finance bubble was reaching its peak. On the evidence provided, the feds never had their wits about them, even when the going was good. Resumed in The New York Times, we discover that “top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was ‘rising through the roof.’ But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy…instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.”
While the American authorities couldn’t spot a crisis, the Euro- fixers were actively creating one. Draghi is a veteran of the World Bank, the Italian Treasury, and Goldman Sachs. He was on the job in Rome while Italy was building up the debt it now finds so hard to pay. Christine Lagarde, now head of the IMF, was French finance minister from 2007 to 2010 — when France increased its public debt by about 50%. Dust any financial crime scene from the last 20 years and you will find prints from them and the whole confrerie of public payroll dunces who now claim to be fixing the system. They are the very same people who brought Europe…and the world…to the brink of financial disaster. And now they preside over more monetary and fiscal policy tweaks, more controls, more regulations, more ‘stress tests.’
Most likely, the leading financial institutions…as well as most of the sovereign nations of the developed world… are already insolvent. We say “most likely” because neither we nor anyone else can know. Real solvency — like the value of the ECB’s collateral — is not judged by earnest ratings, phony stress tests, or bureaucrats. It’s determined by the real stress test of the marketplace.
No one ever knows what anything is really worth — especially what financial institutions with complex holdings and obscure business models are worth. Not even their owners know. The accountants had to interrupt Jimmy Cayne, CEO of Bear Stearns, during a bridge tournament in 2008, to tell him his company was broke.
Insolvency is like death. When conditions change, so does life expectancy. You discover when a company is broke by testing it. We saw, for example, what the banks were worth under the benign credit conditions leading up to 2007. Then, market conditions changed. Under the stress of the market’s new challenge, Bear Stearns and Lehman Bros. died. This caused investors to wonder about the rest of them. But instead of allowing the process of price discovery go on, US authorities stopped the test.
What a pity. We don’t know which bank…or which nation… is insolvent. Most likely, they all are.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Sorry… But the elitists running the show from behind are NOT stupid! The destruction of the American economy is deliberate. The only thing at issue is that the crooks running the show want to boil the frog slowly so there isn’t a revolution! So the FED’s are NOT stupid at all. They are just following orders to “slow kill”. You are dreaming Bill
One further point: perverts unfolding their hilarious scams never speak our language even though they are using the same concepts. Behind the polished surface, there is another world of meanings, calculations and games, which brings us to eg. semantics. In such context, you cannot deduce as you would with, well, outsiders.
“By contrast, wise bureaucrats keep their wits about them, even in a crisis.”
Anybody can keep their wits about them if they have no skin in the game.
I think elcid888 has a point. Bill is often dismissing the bureaucrats as incompetent and doesn’t leave room for the power elite acting in their own interests using their bureaucrats to achieve them.
Why else has the Fed debauched capitalism but to save the skins of the elite?
Why else does a country with the ultimate deterrent pay almost half the worlds military expenses?
Bill, you once told us that the top 0.1% of the population had about 40% of capital gains, something like that.
We’re told that the uber elite are from Europe.
I don’t know that ‘incompetence’, or ‘fate of empire’ is good enough to explain the crisis the world faces.
You might invest all your money in gold and then have it taken by govt to pay its debts. It’s happened before.
The crisis in the world today is primarily political.
BB wrote “The banks will pretend to be solvent.”
It worked for the Fed.
I also doubt the evil few are fumbling around in the dark. They are about to hire one half of the mob to kill the other half. They can sit in the background and have a good laugh.
Basicaly the whole game involves trust and blocking any competition.
Trust…it is as simple as the fact you can pull out a few paper bills, that in themselves are worthless, but you can fill up your car or buy groceries. The central banks are where the buck stops.
Once the trust is gone, and in Europe it is slipping rapidly, the jig is up.
The competition to fiat is commodity based money. They will do anything to stop that.