Guest post by Azizonomics.
In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking.
Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking.
But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Following the Panic of 1907, a group of private bankers led by J.P. Morgan successfully bailed out the system by acting as lender of last resort. The amount of new liquidity disbursed into the system was set not by academics like Ben Bernanke, but by experienced market participants. And because the money was directed from private purses, rather than being created out of thin air, only assets and companies with value were bought up.
The rationale of the supporters of the Federal Reserve Act was that a central banking liquidity mechanism would act as a safeguard against such events, to act as a permanent lender-of-last-resort backed by government fiat. They wanted something bigger and better than a private response.
Yet the Banking Panic of 1907 — a comparable market drop to both 1929 or 2008 — didn’t result in a residual depression.
Bailing out Spain or not will be on investors lips later this year. Meanwhile, the huge economic problems of Spain are hitting the unemployed, especially the young population. The “lost” generation is about to lose all faith in the social system. Austerity is now a reality. From Bloomberg.
More than 4 million Spaniards are jobless in a double-diprecession that is hitting young people hardest. More than half of 15-to-24 year-olds are unemployed, and 37 percent of those 25 to 34 live with their parents. Rather than starting families and building careers, many young people spend their days playing video games and watching television. As their skills stagnate, they risk falling behind permanently, said Katherine Newman, a sociologist and dean at Johns Hopkins University in Baltimore.
“For the rest of their lives, they’re damaged,” said Newman, who has written about labor and families in Spain. “They don’t recover occupationally, their earnings are depressed for 20 years, they don’t marry at the same rate.”
All eyes are on Spain as the euro crisis seems to deepen by the day. The country’s banks are in dire need of capital, which Madrid is unable to easily provide. Yet the government continues to resist outside pressure to accept bailout money from their euro-zone partners. Instead, in an effort to avoid submitting to conditions that would be imposed in exchange for a bailout, Madrid has turned to the financial markets, an approach widely considered to be both unsustainable and a grave risk to the health of the euro zone.
Laden with bad loans left over from the collapse of the country’s real estate bubble in 2009, the country’s most troubled institution, Bankia S.A., reportedly needs €19 billion ($24 billion) in fresh capital. In total, the Spanish banking sector is thought to need between €75 billion and €100 billion worth of liquidity. Borrowing costs on 10-year bonds, meanwhile, have crept close to the dangerous 7 percent mark, widely considered to be unsustainable.
I have been braying on this video channel that the European banking problem is so big as to be unsolvable. On a May 29 video I quoted a Spanish financier as saying: The Spanish loan loss problem has not been quantified by anyone because there is huge pressure not to tell the truth. Spain has engaged in a policy of delay and pray.
Apparently the delay is over, the can has gone as far down road as it could be kicked, whatever. Spanish banks are so broke that they are willing to open their books to the auditors. Yesterday the Spanish Economy Minister said that three groups of auditors, that include the top five American and one German firm as well as the IMF. VIDEO BELOW.
European officials are weighing up a bailout programme for Spain that would aid its fragile domestic banking sector while imposing only “very limited conditionality” on Madrid, a concession that could make a reluctant Spanish government more willing to accept international assistance. Unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans. http://www.ft.com/intl/cms/s/0/81e1c8ec-afe5-11e1-ad0b-00144feabdc0.html#axzz1x51pZngY
The pattern is now all too familiar and has been a regular feature since the financial crisis. Fears of systemic stress and weak US economic data spark dramatic declines in Treasury yields, followed by the Federal Reserve launching a new round of bond purchases, confirming the pre-emptive positioning of bond investors. Against the backdrop of the eurozone crisis and a poor US jobs report for May, the big drop in Treasury yields and record low mortgage bond rates suggest this pattern may repeat itself and that a third round of quantitative easing, or QE3, looms when the Fed meets later this month.http://www.ft.com/intl/cms/s/0/5a158b8a-af1a-11e1-a8a7-00144feabdc0.html#axzz1x51pZngY
The US Federal Reserve is set to propose new capital rules on Thursday, including a provision that will reverse a policy that has helped shield US bank capital levels from volatility, people familiar with the matter said. US banking industry groups and lenders, including Citigroup and Wells Fargo, have been trying to persuade lawmakers that the measure, which is among a batch of proposals to implement the Basel III accords, will hurt them relative to overseas competitors. They also say that they may have to curtail purchases of long-term US Treasuries and municipal debt.http://www.ft.com/intl/cms/s/0/738bc31a-b026-11e1-ad0b-00144feabdc0.html#axzz1x51pZngY
El Erian on the challenges for the Financial Sector.
I suspect that virtually everyone would agree that, in the last few years, we have seen an unprecedented focus on regulatory reform, and rightly so. Indeed, the issue has not been the input but, rather, the output.
Since the financial crisis, lawmakers in several countries have passed on paper seemingly sweeping financial reform, and regulators have been working hard to implement the details at a breakneck pace. Examples of national, regional and multilateral initiatives include (and are certainly not limited to):
The Dodd-Frank Act in the United States that, among other things, involves the overhaul of the derivatives landscape, increases transparency and disclosure, implements the “Volcker Rule” that limits trading activities within banks and establishes measures meant to address both “too big to fail” and systemically important institutions;
The European Market Infrastructure Regulation (“EMIR”), which, similar to Dodd-Frank, addresses derivatives trading, central clearing, fund structure and reporting and disclosure requirements in Europe;
Markets in Financial Instruments Directive (“MiFID”) II, which, in updating the original directive, addresses issues of high frequency trading, transparency and position limits in Europe; and
Basel III regulations on capital requirements and other aspects to be phased in between 2013 and 2019.