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Defining Moment

Blog entry posted by anciendaze, Dec 9, 2011.

Today's news tells me the Eurozone has reached an agreement on closer fiscal integration, minus the U.K. There are other, more ominous, signs, though they may not accurately reflect response to this. Time will tell. The important point is that EU leaders have agreed to give up significant aspects of fiscal sovereignty without waiting for public support for such an idea to materialize.

The U.K. demur was predictable. It has had both a continuously functioning democracy and economy longer than any of the other big participants. Giving up any scrap of control over budgets would likely result in a vote of "no confidence" at home. It also has a central bank which has done a good job of protecting the "City of London" from the collapse of other economies. This makes those financial institutions lumped together as "The City" prime targets for ECB regulators looking for more capital.

Counterbalancing this change designed to bolster flagging economies we find that Moody's has now downgraded debt of three major French banks: Credit Agricola, BNP Paribus, Societe Generale. Among the criticisms motivating this we read that they are carrying too much debt and risk, which we knew, and also that they rely too much on "wholesale financing".

The problem is that individual investors are staying away from these institutions. Only governments moved by concerns far removed from return on investment, or institutions which would collapse if they did, will lend to them. In fact, individual investors are not simply wary about interest, they are deeply concerned about losing any principle they lend.

This might be blamed on lingering memories of the meltdown in 2008, if not for another piece of news. Jon Corzine, former CEO of bankrupt MF Global Holdings, has publicly said he doesn't know where about $1.2 billion of investors' money is. This might seem a trivial sum to Congressional movers and shakers, but to investors it represents real money. If the CEO doesn't know what happened or where it went, common assumptions about accounting practices and regulatory oversight are null and void. Even the late "Jimmy the Greek" didn't have the temerity to use this excuse, he was a reputable bookie.

None of the measures taken to date solves more than short-term crises of liquidity. Investors are still faced with two possible interpretations for events in the recent past: 1) even the top dogs in financial institutions don't know what is going on; 2) fraud is an essential tool of high finance. With this level of uncertainty about what is going on inside financial institutions I will be one of those individual investors withholding loans.
anciendaze

About the Author

As the name suggests, I am old and dazed. The avatar illustrates my rule of thumb: "Hang on! This ride isn't over."
  1. anciendaze
    Minus the UK ...Before you damage a shoulder patting yourself on the back, you might check on handling of the problems of the Royal Bank of Scotland, and the organization responsible for oversight. (You may recall a previous debacle with Northern Rock.) RBS survives, but the FSA is going out of business. Does that make you feel all warm and fuzzy?
  2. Enid
    Minus the UK - not too stupid in many things except some proclaiming themselves medics. Now we relying on you ancientdaze to sort that out. Back to mince pies which - gee I wish they went down.
  3. anciendaze
    Meanwhile, back in the U.S. we learn that top people at Fannie Mae and Freddie Mac have been charged with fraud. (For those outside the U.S. unfamiliar with these names, I include the alternatives Federal National Mortgage Association or FNMA and the Federal Home Loan Mortgage Corporation or FHLMC. These unusual individuals have had considerably more influence on Americans than more popular names like Fannie Brice ("Baby Snooks") and Freddie Mercury. They control far more money.)

    I will hazard a prediction that the indicted individuals will mount successful defenses on the grounds that nobody could tell what was going on. This should be an indictment of the entire business, including its government components.
  4. Marco
    As someone with a foot in both the UK and continental Europe the possibility of the UK moving further away from Europe is bringing tears to my eyes.;)
  5. markmc20001
    I believe 500 billion Euros will just about cover 14 months of Italian deficits alone. This is described as a long-term solution.

    Yikes! what a disaster.

    This article illustrates what the eurozone crisis means for the average person.

    http://www.philstockworld.com/2011/12/10/europe%E2%80%99s-deadly-transition-from-social-democracy-to-oligarchy/
  6. anciendaze
    Just a clue that my analysis of the banking crisis has some merit. A new report on the collapse of the RBS will say that regulators did not understand the finances of the industry, not just that bank. It also says the bank was too dependent on "wholesale financing", meaning short-term revolving credit from other banks.

    The same ominous terminology has been used recently by credit rating agencies when they downgraded debt ratings for three major French banks. The problem was that nobody, except those who would suffer if the bank collapsed, was willing to lend to it.
  7. anciendaze
    ..."With Merkel backing down, leaders agreed this morning to now accelerate the start of their 500 billion-euro fund ($666 billion) to next year."I believe 500 billion Euros will just about cover 14 months of Italian deficits alone. This is described as a long-term solution.
  8. markmc20001
    I'm disappointed Angela Merkel dropped the idea of forcing banks to write down debt. This essentially means the debt will be taken on by the taxpayers. Private gains, socialize the losses.

    "European Union leaders dropped their demand that investors share the cost of bailouts"

    "With Merkel backing down, leaders agreed this morning to now accelerate the start of their 500 billion-euro fund ($666 billion) to next year."

    http://www.bloomberg.com/news/2011-12-09/eu-leaders-drop-demands-for-investors-to-take-writeoffs-in-future-bailouts.html
  9. Enid
    Not at all anciendaze - the French Normans (men from the north - ie probably Danish etc settled and absorbed the cultures they conquered rather well). I've a very great who carried the papal banner for William the Conqueror - which is a delight since they gave up their martial ways and built churches and monasteries here). Phew what a relief. Seriously the origins of the aristocracy here. Perhaps the Anglo Saxon mix (German) makes us extra cautious about things imposed (well of course 2 world wars as well). We muddle innocently through which seems to be part of us - but wiser for you and us.
  10. anciendaze
    Enid, I suspect your ancestors had a more direct connection with Vikings than via Normans or other Sassenachs, (Sasenachs, Saeson, Sawnecks). Correct me if I guess wrong, but I hazard that you live in the area originally described as the Danelaw, if not in Scotland proper, where, as John Cleese put it, Norsemen "raped our foremothers".

    This forthright assertion of sovereignty is a sharp contrast to modern empire building, which concentrates on obscurity and confusion over numbers, rules and what they may mean. My theme in a whole series of posts about economics is that a modicum of honesty is essential to financial transactions, which otherwise become games with Monopoly money minus the paper. If my bank tries to tell me "you may have won $1,000,000" I instinctively tighten my stomach muscles in preparation for a revelation concerning the amount this is going to cost me.

    From about 2001 to 2008, we were all bombarded with the equivalent of "you may have won" messages. Any connection between the action of writing a loan and fiduciary responsibility had vanished. Those with the resulting play money bid up prices of real estate, and derived financial instruments, to unrealistic and unsustainable heights. Gresham's law was seen in action on computer screens, where all numbers look the same. The sad results are still with us.

    Nothing in a long series of actions transferring bad debts to larger and larger and larger institutions, ending with those able to print money, has eliminated the chance to play the whole tune again as soon as oversight succumbs to ennui. Unless it becomes possible for ordinary mortals to tell what their money is doing, and where it is sleeping, I don't expect any return of confidence.