Recommended reading: Excellent piece by Pater Tanebrarum
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John Clark
Dec 21, 2011, 6:22:34 PM12/21/11
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Dear all,
Pater's recent piece is highly recommended reading. It's got so much great content in it. For those with an interest in history, theres a great summary of the history of banking and lending in there too.
Read it here: The ECB’s LTRO – A Giant Inflationary Push
Here's some choice quotes from it (but don't think this excuses you from reading it!):
Let me remind you, the Euro area governments and central banks are desperately doubling- and tripling-down at this time, and in doing so (as Pater correctly points out) tying their fates together and amplifying the size of the consequence should their desperation fail.
I repeat - if it fails (and there is a very real chance it will), these behaviours have magnified the consequences to the point where it would go very, very bad.... much worse than it ever needed to.... "supernova bad" is not overstating it much.
In any case, if it doesn't fail there will still be major casualties along the way, including long term stagnant or negative growth and either (or both of) serious declines in investment markets or serious declines in their associated currencies. There is no magic solution, and every pill option from here on in has serious side-effects.
Signing off
John
Pater's recent piece is highly recommended reading. It's got so much great content in it. For those with an interest in history, theres a great summary of the history of banking and lending in there too.
Read it here: The ECB’s LTRO – A Giant Inflationary Push
Here's some choice quotes from it (but don't think this excuses you from reading it!):
“One should not underestimate the willingness of banks to play the Ponzi with free money. A fractionally reserved system is after all at all times on the very edge of insolvency. The euro area's especially so – of € 3.92 trillion in sight deposits, only € 211 billion were actually covered with standard money before the most recent halving of reserve requirements. In theory, if more than 4.6% of depositors were to exercise their legal claims to standard money, the banking system would become instantly unable to pay. We say 'in theory' because it is of course backstopped by the central bank - as we can in fact once again see in the recent balance sheet explosion.
....
Anyway, why would a system that is constituted like that refuse to gamble with free money? It is the very essence of its business.”
....
In short, like every modern central bank, the ECB wants to be free to inflate as much as is possible without people noticing, so the speed and degree to which the purchasing power of the money it issues declines is high up on its list of priorities.
....
What it does represent is the chance for a pause in the crisis, i.e., it gives everybody more time to dig an even bigger hole. What is also noteworthy about all this is that it confirms something we have often stressed: the root of the current crisis is in fact the credit expansion and boom engendered by the fractionally reserved banking system prior to the 2008 caesura. The crisis goes well beyond a mere sovereign debt crisis in that sense – it is more profoundly systemic in nature and concerns the monetary system itself. Concurrently with the liquidation of malinvested capital, the unsound credit supporting these malinvestments needs to be liquidated as well. This is precisely the process the ECB's latest measures attempt to arrest or at least delay.
.....
A bank that may one day require a government bailout will go under anyway if the government debt crisis worsens further. So it has actually nothing to lose by adding to its holdings of bonds issued by said government. They will both sink or swim together no matter what.
....
The banks are probably being told by their governments 'if you want our help, you better show up when there's a bond auction'.
....
Anyway, why would a system that is constituted like that refuse to gamble with free money? It is the very essence of its business.”
....
In short, like every modern central bank, the ECB wants to be free to inflate as much as is possible without people noticing, so the speed and degree to which the purchasing power of the money it issues declines is high up on its list of priorities.
....
What it does represent is the chance for a pause in the crisis, i.e., it gives everybody more time to dig an even bigger hole. What is also noteworthy about all this is that it confirms something we have often stressed: the root of the current crisis is in fact the credit expansion and boom engendered by the fractionally reserved banking system prior to the 2008 caesura. The crisis goes well beyond a mere sovereign debt crisis in that sense – it is more profoundly systemic in nature and concerns the monetary system itself. Concurrently with the liquidation of malinvested capital, the unsound credit supporting these malinvestments needs to be liquidated as well. This is precisely the process the ECB's latest measures attempt to arrest or at least delay.
.....
A bank that may one day require a government bailout will go under anyway if the government debt crisis worsens further. So it has actually nothing to lose by adding to its holdings of bonds issued by said government. They will both sink or swim together no matter what.
....
The banks are probably being told by their governments 'if you want our help, you better show up when there's a bond auction'.
Let me remind you, the Euro area governments and central banks are desperately doubling- and tripling-down at this time, and in doing so (as Pater correctly points out) tying their fates together and amplifying the size of the consequence should their desperation fail.
I repeat - if it fails (and there is a very real chance it will), these behaviours have magnified the consequences to the point where it would go very, very bad.... much worse than it ever needed to.... "supernova bad" is not overstating it much.
In any case, if it doesn't fail there will still be major casualties along the way, including long term stagnant or negative growth and either (or both of) serious declines in investment markets or serious declines in their associated currencies. There is no magic solution, and every pill option from here on in has serious side-effects.
Signing off
John
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