Stratfor: can Europe’s banks break free from their doom loop?

Summary: Banks are the financial heart of modern nations, and Europe’s are in trouble. One of its greatest, Deutsche Bank, has severe problems. Here Stratfor looks at the perilous state of Europe’s banks, looked in a doom loop by their holdings of government bonds.


Can the Eurozone Break Its ‘Doom Loop’?

Stratfor, 16 February 2017.

In 2012, Europe’s sovereign debt crisis exposed the “doom loop.” Created by European banks’ tendencies to hold their home government’s debt, the vicious cycle, in theory, starts when markets lose faith in a government’s ability to pay back its debt, precipitating a sell-off of its bonds. The resulting drop in bond prices would then hit the balance sheets of the banks that still hold those bonds, making them more likely to need a bailout from their governments. This, in turn, could further erode investor confidence, leading to additional sell-offs that damage the banks even more. Despite the danger that banks’ practices pose, eurozone regulators have yet to find a way to sever the loop.

In the years since a doom loop nearly led to the eurozone’s collapse, authorities have tried (but failed) to break the bond connection between banks and their governments. A German proposal to limit the amount of their own government’s debt that banks can hold has been hotly contested by Italy and Spain, since implementing it would cause massive disruptions to their economies. Another German-led measure involved the creation of “bail-in” rules, which were adopted at the start of 2016. They required that a troubled bank’s private debtholders absorb its losses first, essentially losing their investment, before government money could be used to bail it out.

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Stratfor: China Is Building Its Future on Credit

Summary: China, like the US, has surprised the bears by the resilience of its economy. Here Strafor examines one source of its economic strength, one that might haunt its future — massive and imprudent accumulation of debt.


China Is Building Its Future on Credit
Stratfor, 20 July 2016


As China tries to overcome slowdowns in its industrial and trade sectors, the country’s banks have continued to increase the pace of lending, issuing 1.38 trillion yuan ($205.8 billion) worth of loans in June. The figure confirms some economists’ expectations that lending will keep rising as China’s central government attempts to revive economic growth and boost property markets that showed signs of another slump in May. It also indicates that despite Beijing’s repeated pledges to reduce the economy’s reliance on credit and state-led investment, the easy flow of financing from state-owned banks remains the country’s primary bulwark against widespread debt crises among corporations and local governments.

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Banks Are The Key To This Stock Market Decline, & The Recession That Might Follow

Summary: After years of slow economic growth and rising asset prices in America, with investment gurus and economists predicting booms & crashes, events have again taken center stage. It’s time to again pay attention to the data.  {2nd of 2 posts today}

  • Risk markets are rolling over, high-grade bonds rise on a flight to safety.
  • Broad price movements like this are seldom false alarms; something is happening to fundamentals.
  • As usual during the early stages of a crash, we can only guess at the causes. Every crisis is unique. Do not assume this will follow the 2008 script.
  • Watch the banks! Banks lead us into financial crises; their stabilization leads us out.
  • Watch the data and take incremental steps to a more defensible portfolio stance. Avoid predictions!


Clear vision

This is another in a series of posts about the end to the expansion cycle which began in 2009 (links at the end). We can only speculate about the details and timing, but the broad outlines slowly become visible.

Look to the center of the decline in risk prices: banks. Their stocks are falling. Prices of their credit default swaps are rising. Concerns about their solvency have spouted suddenly, like daffodils after the first Spring shower. That’s how it should be. …

Read the rest at Seeking Alpha.


Are conservatives right about the Fed? Is it a malign force in America?

Summary: Central banks have never been more powerful, more significant to the economy, more controversial (although they’ve often been unpopular), or more misunderstood. Today we debunk two of the myths about their evil they do; at the end are links to posts about their limitations.


World money


  1. About conservatives’ faux history and economics
  2. About investment bubbles
  3. About the joys of unregulated banks
  4. Instead of the Fed, look at the new banks
  5. For More Information

(1)  About conservatives’ faux history and economics

Conservatives have devised a body of faux history and economics to justify their 1%-friendly public policies. Central to this is Fed-hating.  The 1% uses hatred of the Fed to motivate its troops, while cherishing the Fed as one of its most useful agents. The Fed by design supports the banks’ solvency and profits (hence drawing its governors from bankers and known bank supporters). This contradiction shows how our inability to see the world around us prevents our effective political action.

Let’s examine two charges of the Fed haters:

  1. The Fed creates investment bubbles that distort and disturb the economy — unlike the good old days under the gold standard.
  2. The Fed, and the other bank regulatory agencies, restrain the natural entrepreneurial vigor of the banks.

(2)  About investment bubbles

Economic bubbles occur naturally in free-market systems, occurring often even under a gold standard. Such as the 17th century Tulip Mania (see Wikipedia), the earliest documented bubble (although details are uncertain). There are different kinds of bubbles. Here we discuss investment bubbles, excessive enthusiasm for a specific kind of investment which attracts too much capital, followed by a bust.

The giant UK investment bubbles of the 19th century were more similar to those of our time (e.g., in technology and housing). To learn more about them I recommend reading “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” (26 February 2012) by the brilliant Andrew Odlyzko (Prof Mathematics, U MN; his bio here). Excerpt:

Those {bubbles} of the 19th century lasted for several years, and involved huge real capital investments.

… The British mania of the mid-1820s … involved real capital investments of about £ 18 million in joint-stock companies, most prominently for mines in Latin America, and £ 25 million for loans to foreign governments, again largely in Latin America. The total, £ 43 million, was slightly over 10% of British GDP of that period, comparable to $1.5 trillion for the U.S. today, and was regarded by the British public at the time of the Railway Mania in the 1840s as an almost complete loss.

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The bailout of Spain’s banks shows the heart of our problem

Summary:  The US and Europe have not recovered from the 2008-09 crash in part because we applied first aid, but squandered the time those measures bought for us (at great cost).  An essential aspect of post-crash reforms is fixing our financial systems.  The bailout of Spain’s banks — expensive for Spain’s people, easy money for the banks — illustrates the problem.  Here we give details and alternatives.  At the end are links for more information

The modern bankers’ flag

Banks are central institutions in western economies.  Almost every severe economic crash has a large bank failure in the early phases.  That’s almost inevitable given their exposure to the broad economy, leverage, and reliance on borrowed funds.  But their political power makes them resistant to reform, and full recovery from a downturn usually requires their reform.  The most important aspect of this is sharing the loses.  Banks will use their political strength to shift losses onto other.  That’s neither fair, economically sound (as it encourages moral hazard), or necessary.

It’s another example of Capitalism Lost: America goes broke because we forgot how to be capitalists.

The US has experienced massive bank failures every decade since 1980, and we’ve yet to learn how to cope with them.  This is learned helplessness, a consequence of money usefully applied to shape not only public policy but als0 public outcomes.  We saw this demonstrated in the rise and corruption of the Tea Party movement.  Born in opposition to bank bailouts, becoming shock troops for election of bank-friendly Republicans (for details see Occupy Wall Street, another futile peasants’ protest).

For a summary of the problem and alternative see “The Heart of the Matter“, John P. Hussman, 11 June 2012 — Excerpt:

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

… Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding. The rest is debt to the bank’s own bondholders, and equity of its stockholders. When a country like Spain goes in to save a failing bank like Bankia — and does so by buying stock in the bank — the government is putting its citizens in a “first loss” position that protects the bondholders at public expense. This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all. All of the bank’s liabilities – even to its own bondholders – are protected at public expense. So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens. This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market. Depositors don’t lose a dime. While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

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The unseen but perhaps decisive grand alignment of the nations!

Summary:  Yesterday’s post The end of the post-WWII world is not the end of the world discussed the large-scale processes at work now.  Today we discuss the most astonishing — and seldom seen — aspect of these things.

The problems of the many individual nations in crisis have received ample attention from experts.  The two global dimensions of the crisis have not.  First, the global financial regime no longer works well (as seen, for example, in the faltering ability of the US to act as the reserve currency, the disinterest of other nations in replacing the US in that role, and the wild gyrations of currency values).  Second, the large number of nations experiencing large-scale structural change.  Here we look at the second — and least well seen — aspect.


  1. The grand alignment of the nations
  2. Cause of the grand alignment
  3. A tour of the nations
  4. For more information

(1)  The grand alignment of the nations

What caused the disaster of the Titanic?  There was no single cause, it resulted from a constellation of simultaneous events.  Bad weather. Bad luck. Mistakes. Lost gear. Errors of judgement.

Similarly today we have the major nations of the world simultaneously at or near (1 or 2 years?) major inflection points: Eurozone, UK, Japan, USA, and China.  In each case largely due to internal dynamics, as their current internal economic systems fail and require major reforms.   It’s the geopolitical version of the planetary grand alignment (which allowed NASA to send the Voyager One and Two probes to tour the solar system).

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What every American needs to know about the Federal Reserve System

Summary: The Federal Reserve has become one of the most powerful government agencies, operating almost free of checks and balances.  Worse, it represents one of the most outrageous examples of regulatory capture, private interests taking control of agencies intended to supervise them.  Today we have Michael Hudson to explain to use the significance of these events.

From The Independent Word

An interview with Michael Hudson published on the Russian website Terra America.  Posted here with his generous permission.  His bio appears at the end.  Red emphasis added.

Question: What is the place of the Federal Reserve System in the American financial and economic structure?

Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.

But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.

However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit.

So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

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