Why are we bailing out the banks? – Part Four – What happens now?
Another must read by Golem XIV.
In part one of this series I suggested that the simple reason we were bailing out the banks and simultaneously cutting public spending was because,
If the banks were to be wound up it is their [the wealthiest 10%'s] credit/debt backed ‘money and the assets held in it, which would burn to ash….So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.
In part two I argued that while the simple selfishness answer is true there are also theoretical justifications (albeit flawed ones) for the bail and cut policy.
The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending….Basically – Private Debt good, Public Debt bad.
Fixed Income Overview
Guest post by Peter Tchir.
From Risk Off to Risk Neutral
Until Friday of last week, we had been in a risk off stance. We had believed that the market was too optimistic about what immediate impact QE would have and that too many had over-estimated how eager Europe was to proceed with new and bigger bailouts. Those all helped our view, but in the end, earnings turned out far worse than most were expecting. The earnings story has been a drag on the market for the first time in recent memory. Even Apple struggled. The outlooks were even gloomier than the actual results.
So why are we switching from Risk Off to Risk Neutral or even Risk On?
First, S&P 1,400 helps. We believe the range on this downside move had been 1,375 to 1,400 so there is still some room lower, but we hit levels that make sense for us to look for a reversal. Then there is Apple. For the first time in a long time, I can see some strength building for Apple. Maybe we will get more profit taking, but given their earnings, the cash on hand, and the magic of round numbers, right around $600 seems like we could see some support and new investors who missed the surge to $700, step in and take a shot. Apple is so large in the Nasdaq, the Nasdaq 100 (QQQ) that it alone can drive the indices. Even the S&P is affected directly and indirectly by Apple.
Why Are We Bailing Out the Banks Part III (of IV) – The Big Lie
Guest post by Jessie.
Economics and the corporate media did exemplary service in promoting ‘the Big Lies’ of the financialisation crisis, most notably efficient markets theory and the trickle down theory of stuffing the rich with even greater power and wealth in the thought that some of the excess would fall on the path for the little people.
“Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.”
John Kenneth Galbraith, New York Review of Books, 1982
They have tied these old canards so carefully to emotional arguments that even after the crisis and collapse, many people will still respond reflexively to anything that shakes their faith in a failed, fallen system.
One only has to verbally put a certain color shirt on a group of people’s backs, and paint a different color shirt on some others, and given some prompting and rationalization, they will descend on the others with all the reckless passion and unfeeling of the school yard, even doing unspeakable things to others that they know is wrong, in the name of the expediency of winning. Such people are easily led as they surrender their will to expediency, and a more powerful force of will.
Some years ago I remarked on a sad gathering of a knot of old school Communists in Red Square that I saw, lamenting the passing of the Soviet Union and Stalinism. There were those who had benefited from it, leading those who could not accept that the system had failed and change was coming. They huddled in the winter winds that blew across the square, their old banners fluttering, looking for someone to tell them what to do.
I see the same thing growing in the US and the UK today. But the lament is not for Communism but for the saving of crony capitalism, the heartless abuses of the oligarchy and the robber barons that have been cross branded with freedom and liberty. Their campaign is well funded and staffed with willing minds who will say or do almost anything for money. They have not yet destroyed themselves, but they are well on their way.
Why are we bailing out the banks? Part two. Theory, Ideology and Failure.
Another must read piece by Golem XVI.
In part One I argued that if we want to understand why our rulers have insisted we MUST bail out the banks we simply have to look at who owns the banks and the vast bulk of the wealth they house. And surprise, surprise the owners of most of the financial ‘wealth’ are…our rulers and their friends.
I ended by suggesting that true though I felt this was, there were also theoretical reasons why some people felt the banks must be protected at all costs -as long as the burden of paying that cost was placed firmly upon the backs of the little people, you understand.
So….
Why are we bailing out the banks? The Simple Answer.
Another must read piece by Golem XIV.
We’ve all seen the film ‘Groundhog Day’. Well, we’re in it. Every morning the radio plays a song which has the chorus, “I rob you babe”. And sure enough when the news comes on, they have. A full five years of pumping money in to the banks and still our leaders will not even consider that they might be wrong. They still insist, as they have from the start, that “There is no alternative’. Call it bail outs, call it QE, call it monetary policy, rescue or suicide, it doesn’t matter. What matters is we’re still doing it.
When our leaders embarked on their policy of bailing out the banks’ private debts, even those of us like me, who believed our rulers were hideously wrong to do so, still harboured a hope that they were at least sincere; that they really were, as they claimed, trying to fix things for all of us. I find this impossible to believe now. If any of the bankers, their experts and our politicians ever were sincere when they claimed we would all be in this together, it now seems terribly clear that none of them has any intention of being with us in what is being forced upon us now.
Mañana Mañana Mañana
Guest post by Peter Tchir.
Full of Sound and Fury, Signifying Nothing
It feels so long ago that we woke up to so many stories about Europe pushing risk around (it was less than 2 weeks ago). Spain is allegedly in talks to get the bailout. ESM is on track to launch in October and Greece may get some government help. I’d like to get excited, but I just can’t.
I find the attitude in Spain particularly troubling. The last minute solutions forced upon by market weakness, followed by interminable delays, is just not working. It may be helping the stock market but it isn’t helping the economy.
This summer, when everyone was talking about Euro 2012 – the soccer tournament, not the collapse, the Spanish government got a deal to recapitalize the banks. Rajoy promptly got on a plane and went to watch the football. Here we are, 3 months later (or is it 4), and nothing has been done. In theory, Bankia was supposed to get money in July. It didn’t. There is at least 1 MOU, 2 Committees, and 10 new acronyms, but no actual money. In the meantime, Spanish banks continue to bleed deposits on a daily basis.
The situation in Greece is would be comical if it wasn’t so bad. Every round of new lending is delayed. The ECB and EU insist on getting paid when anyone with even half a brain can see that the debt burden is not sustainable. Rather than the extend the maturity on the loans made so far, drop the coupon, or even reduce the notional, the Troika has done nothing. Eventually they will do something because Greece and the Euro are in no position for a Grexit, but by the time they do, Greece will have gone through at least 6 months of economic woe while the politicians bicker. Neo Nazi parties have gained popularity, in no small part because of this futile attempt to pretend that the “bailout” was anything other than secured lending that Greece couldn’t handle. And maybe I’m the only one who remembers, but the banks were supposed to be recapitalized in March, after PSI, what happened with that?
Spanish Nervousness is Back
As we warned about Spain to revive the market nervousness a few days ago, we are suddenly back to watching those Spanish yields climbing again. Markets do not like uncertainty. The contradictory messages from Spain, is once again making investors “confused”. With markets at critical levels, vol at relatively low levels, and an extreme reading in the put call ratio, you should be prepared for a sharp pullback.
Spain is still in pain. From El Pais.
“Uncertainty is a risk,” said the Spaniard, who is also the EU commissioner for competition. “Sometimes it is difficult to take a decision and this is a very complicated situation. Any alternative has its pros and cons, but to maintain uncertainty implies a risk that the debt market or another factor increases tensions again. We have learned in the past two-and-a-half years where these tensions could lead to.”
According to government sources, Rajoy wants to delay asking for a second bailout on top of the rescue package for the country’s banks and may even eschew the option if the economy improves sufficiently to avoid the political stigma involved.
However, Economy Minister Luis de Guindos is in favor of requesting a second intervention as soon as possible to ease market pressures. He would like to see one of the European rescue funds buying Spanish debt in the primary market to trigger purchases in the secondary market by the European Central Bank (ECB).
Spanish Banks Bleeding Cash
Yes, the IBEX has rallied since early this summer, but unfortunately, the Spaniards continue withdrawing funds from the banks. Banks can take this for some time, but will eventually need to cut back on the loans to deposit ratios. This is not what the SPanish economy needs. From Bloomberg.
Spanish banks, already hooked on cheap European Central Bank loans, are haemorrhagingdeposits as the government debates whether to seek a bailout.
Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain. Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers.
Spanish bailout is now inevitable
We are getting an ever increasing deja vú feeling yet again. In 2011 it was all Greece, now just change that to Spain. Same, same, but different, or? From Presseurop.
There are three conclusions to be drawn from these events. The first is that Spain is heading inexorably towards a bailout, probably quite soon. It was always a case of smoke and mirrors to imagine that the promised €100bn (£78bn) package of support for Spanish banks would be enough and so it has proved.
This is a country with a collapsing economy, an imploding property market, banks nursing colossal losses, and 10-year bond yields at 7.5%. The question is not whether there will be a bailout, but how big it will be. At least €300bn in all probability.
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