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European Bank Socialism
The motto "Too big to fail" frees the financial sector from all chains. In the future, the banks will not have to assume any liability for taking irrational risks. Instead they can commit fraud without limit-in a system that already leads us to the brink and creates millions of unemployed in Europe alone. In return, banks can pay out tax-subsidized bonuses. The bank debts in the EU are much greater than the state debts. Banks must be allowed to go bankrupt instead of being supported with public funds when they commit fraud.
EUROPEAN BANK SOCIALISM
By Wieslaw Jurezenko
[This article published in August 2012 is translated from the German on the Internet, http://www.blaetter.de/archiv/jahrgaenge/2012/august/europaeischer-bankensozialismus.]
The financial crisis celebrates its five year jubilee in 2012 and seems to be unending. More and more states fall in its suction. People even talk everywhere of the end game of the euro.
Politics resolves ever greater things at increasingly frenzied summits. At the latest summit, the rush jobs of politics heap up at such a speed that an overall view on what was done and how much this will cost is lost.
The resolutions include a direct re-capitalization of the banks by the European Stability Mechanism (ESM). In addition, a new European bank monitoring authority will be created by the end of 2012 facilitating the access of states to the EU bailout-umbrellas.
However the hope of breaking through the vicious circle of stricken banks and sick state finances could prove illusory. The recently resolved measures mainly treat symptoms. On top of everything, they conceal enormous dangers for the European state alliance and the global financial system.
FRAUD WITHOUT LIMIT
Up to today, a reliable regulation of the inflated and out-of-control financial sector has been lacking. Instead of seeking a permanent solution of the crisis, the EU states abandon principles at summit after summit that they had previously repeated like mantras – and contribute to aggravating the situation.
At the beginning of the crisis, stabilizing so-called system-relevant banks was central so the financial system wou9ld not collapse with a great bang. This limitation changed into its opposite after the last summit. The newly created European Stability Mechanism was designed to supply every bank with sufficient capital. There should not be special conditions concerning investment banking.
The motto “Too Big to Fail” frees the financial sector from all chains. In the future, the banks will not have to assume any liability for taking irrational risks. Instead they can commit fraud without limit – in a system that already leads us to the brink and creates millions of unemployed in Europe alone. In return, the banks can pay out subsidized bonuses that are often in inverse proportionality to the performance of the enriched.
The planned European bank oversight that should monitor all institutes in the EU will not accomplish much against this boundless fraud. This European Banking Authority launched at the beginning of 2011 and outfitted with an annual budget of 20 billion euro will not have its headquarters in London. Instead Angela Merkel prevailed that the already overstrained European Central Bank in Frankfurt will take over this new function. How the EU will establish an effective bank oversight there by the end of 2012 is still completely unclear.
RISKY SNOWBALL SYSTEM
The risks will not be banished even if the bank oversight monitors the transactions of the money-systems more strictly. The intention of the Brussels resolutions is to prevent all bankruptcies. The summit decisions may lead to the exact opposite, to a dangerous snowball system that can trigger a bankruptcy avalanche at any time burying everything.
The unrestricted re-capitalization of all banks is necessary since these have a growing write-off need on account of the collapse of EU bonds. For this reason, they need more money which also must be refinanced.
The Brussels resolutions also bring a slight gain of time without a recovery of the financial sector and the state budget. Instead the snowball system threatens to bring even more state- and bank-bankruptcies at the end. The sums now necessary to bailout the stricken banks would eat up 45 percent of ESM capital. [1]
Cyprian banks alone need 23 billion euro. The hook is that neither system-relevant banks nor corporate headquarters of the Global Players that could destabilize the world financial system are in Cyprus. Rather there are presumably more mail-box firms and accounts of Russian magnates than inhabitants on the Mediterranean island. Russia has long been engaged in Cyprus to a greater extent than the EU – even if the Russian government first set Cyprus on the blacklist of tax havens in 2008 while the OECD sees everything there in the green.
MAKING BANKS PAY WITHOUT BANKRUPTCY
Thus a stronger control is necessary in which banks should be supported by the ESM (European Stability Mechanism or fiscal pact). No one knows how much European taxpayers will pay in the case of emergency if a bank- or state-bankruptcy occurs – which historically would be nothing extraordinary. [2]
The bank debts in the EU are much greater than the state debts. According to calculations of the IFO-Institute, these debts amount to 9.2 trillion euro in the crisis countries. [3] This sum will be added to the past obligations of the ESM according to the latest resolutions in Brussels. Assets of investors, hedge funds, insurances and banks – that are now governmentally protected – face these bank debts. The taxpayer is liable instead of politics insisting these assets be made liable. The public treasuries support property assets whose owners didn’t have their headquarters in the EU and not only dubious investment banking. This means European taxpayers are responsible for those who don’t pay their taxes in a member country of the Union.
The close interlocking of banks with the shadow-banking system whose order of magnitude surpasses many times over the visible banking system makes the game with debts and assistance more dangerous than all numbers known to the public. [4] However European politicians counter possible loss-risks with the appeasement that ESM guarantees are guarantees and so-called possible obligations, not direct payments. The possible sums are staggering. The state debts of the five crisis-candidates Italy, Ireland, Spain, Greece and Portugal amount to around 3.3 trillion euro.
Thus enormous sums could come to the creditors that would increase proportionately if several states and a series of banks went bankrupt… With such a breakdown, all the calculations presented up to now would be rubbish in one blow.
In short, the ESM only functions as long as none of the participants throws in the towel. That is a feature of snowball systems. Snowball systems last until too many parties want to see their share. In such a case, the system collapses all of a sudden.
THE COLLAPSE IS POSSIBLE
Such a scenario would be a true stress test for the ESM – which the EU obviously doesn’t dare simulate now. The crucial question is: what must be done to prevent such a collapse?
As the example of Greece shows, the EU states could not enforce a genuine joint-liability of the creditor banks in the past. Instead they only enabled banks to offset positions that they already write off – and for which they obtained high interests for years. For a long while, creditor banks did not have to make another contribution but were released from all liability. When they renounce on future gains, creditor banks have losses which they may have already “priced in” internally.
The present plans of the EU aim at something similar for all banks in the European zone. The European Central Bank (EZB) gives banks berth credits in volumes of a trillion euro at an interest-rate of one percent. The banks can give these credits to states and receive back more in interests. On this background, direct state financing by the EZB would be the more rational alternative – though it is not in harmony with the mandate of the EZB.
However the EU is not seriously interested in permanent reforms of the financial sector. Member states have agreed that banks must show higher capital holding rates. At the same time they grant banks extensions until the sun falls from the sky for the introduction of these rates. States have not considered a separation of the dangerous parts of the financial system like the independent trading of investment banks and their connections to shadow banks from the harmless parts,
The summit participants avoided discussing how big a bank may6 be for an economy. How a big bank can go bankrupt without destabilizing the whole system and dragging it to the abyss and how the deposits of customers can be saved in such a case were long unexplained.
REGULATION INSTEAD OF BANK SOCIALISM
The European governments persistently evaded all these questions in the last years. Instead they wore themselves out in trivialities and distributed tranquilizers - like introduction of a financial transactions tax. While it may be socially commanded, this instrument hardly makes today’s financial sector more secure. Firstly, the banks will hardly be dissuaded from their risky transactions on account of the comparatively trifling additional costs. Secondly, the volume of financial transactions may not decrease to a great extent if the proceeds of a financial transactions tax are cancelled.
An enclosure of speculative transactions is an urgent necessity as a fundamental structural reform of the financial sector. The present bank socialism must be ended as quickly as possible. The problem of the ESM is that the water will reach its neck – with a breakdown of one or several debtor states. No other creditor can leap in the breach as a so-called lender of last resort.
We are currently far removed from meaningful and permanent solutions. Thus the settlement plans that the American oversight authority obtained a few months ago from system-relevant banks will not prevent dangerous risks. These banks will also take high risks in the future in the certainty that they will be bailed out in case of emergency with the help of tax money. [5]
In Germany, people are obviously unwilling to draw the right lessons from the crash of the US investment bank Lehman Brothers. The 2010 restructuring law transfers part of the costs of future bank crises to the money-houses. But at the same time, it includes a considerable liability of taxpayers. No law in the past prevented banks from being “too big to fail.” Therefore the sheer size of money-houses remains a danger for the global financial- and economic system.
There is only one way out of the misery. To solve the continuing financial crisis, banks must be allowed to go bankrupt – instead of being supported with public funds when they commit fraud. Otherwise the vicious circle of indebtedness which presently keeps the European Union on its toes will not be broken. Only in this way can we win the end-game around the euro. Otherwise the motto is: Save yourself if you can!
NOTES
________________________________________
[1] Vgl. Oliver Grimm, Bankenunion: ESM wird nun auch Bankenhilfsfonds, http://diepresse.com, 2.7.2012.
[2] Vgl. Kenneth Rogoff und Carmen Reinhart, This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, http://www.nber.org/papers/w13882.
[3] Vgl. das Interview mit Hans Werner Sinn am 2. Juli 2012 im Deutschlandfunk, http://www.dradio.de.
[4] Vgl. Nicola Liebert, Rainald Ötsch und Axel Troost, Der graue Markt der Schattenbanken, in: „Blätter“, 6/2012, S. 83-90.
[5] Vgl. Großbanken machen in den USA ihr Testament, in: „Handelsblatt“, 3.7.2012.
By Wieslaw Jurezenko
[This article published in August 2012 is translated from the German on the Internet, http://www.blaetter.de/archiv/jahrgaenge/2012/august/europaeischer-bankensozialismus.]
The financial crisis celebrates its five year jubilee in 2012 and seems to be unending. More and more states fall in its suction. People even talk everywhere of the end game of the euro.
Politics resolves ever greater things at increasingly frenzied summits. At the latest summit, the rush jobs of politics heap up at such a speed that an overall view on what was done and how much this will cost is lost.
The resolutions include a direct re-capitalization of the banks by the European Stability Mechanism (ESM). In addition, a new European bank monitoring authority will be created by the end of 2012 facilitating the access of states to the EU bailout-umbrellas.
However the hope of breaking through the vicious circle of stricken banks and sick state finances could prove illusory. The recently resolved measures mainly treat symptoms. On top of everything, they conceal enormous dangers for the European state alliance and the global financial system.
FRAUD WITHOUT LIMIT
Up to today, a reliable regulation of the inflated and out-of-control financial sector has been lacking. Instead of seeking a permanent solution of the crisis, the EU states abandon principles at summit after summit that they had previously repeated like mantras – and contribute to aggravating the situation.
At the beginning of the crisis, stabilizing so-called system-relevant banks was central so the financial system wou9ld not collapse with a great bang. This limitation changed into its opposite after the last summit. The newly created European Stability Mechanism was designed to supply every bank with sufficient capital. There should not be special conditions concerning investment banking.
The motto “Too Big to Fail” frees the financial sector from all chains. In the future, the banks will not have to assume any liability for taking irrational risks. Instead they can commit fraud without limit – in a system that already leads us to the brink and creates millions of unemployed in Europe alone. In return, the banks can pay out subsidized bonuses that are often in inverse proportionality to the performance of the enriched.
The planned European bank oversight that should monitor all institutes in the EU will not accomplish much against this boundless fraud. This European Banking Authority launched at the beginning of 2011 and outfitted with an annual budget of 20 billion euro will not have its headquarters in London. Instead Angela Merkel prevailed that the already overstrained European Central Bank in Frankfurt will take over this new function. How the EU will establish an effective bank oversight there by the end of 2012 is still completely unclear.
RISKY SNOWBALL SYSTEM
The risks will not be banished even if the bank oversight monitors the transactions of the money-systems more strictly. The intention of the Brussels resolutions is to prevent all bankruptcies. The summit decisions may lead to the exact opposite, to a dangerous snowball system that can trigger a bankruptcy avalanche at any time burying everything.
The unrestricted re-capitalization of all banks is necessary since these have a growing write-off need on account of the collapse of EU bonds. For this reason, they need more money which also must be refinanced.
The Brussels resolutions also bring a slight gain of time without a recovery of the financial sector and the state budget. Instead the snowball system threatens to bring even more state- and bank-bankruptcies at the end. The sums now necessary to bailout the stricken banks would eat up 45 percent of ESM capital. [1]
Cyprian banks alone need 23 billion euro. The hook is that neither system-relevant banks nor corporate headquarters of the Global Players that could destabilize the world financial system are in Cyprus. Rather there are presumably more mail-box firms and accounts of Russian magnates than inhabitants on the Mediterranean island. Russia has long been engaged in Cyprus to a greater extent than the EU – even if the Russian government first set Cyprus on the blacklist of tax havens in 2008 while the OECD sees everything there in the green.
MAKING BANKS PAY WITHOUT BANKRUPTCY
Thus a stronger control is necessary in which banks should be supported by the ESM (European Stability Mechanism or fiscal pact). No one knows how much European taxpayers will pay in the case of emergency if a bank- or state-bankruptcy occurs – which historically would be nothing extraordinary. [2]
The bank debts in the EU are much greater than the state debts. According to calculations of the IFO-Institute, these debts amount to 9.2 trillion euro in the crisis countries. [3] This sum will be added to the past obligations of the ESM according to the latest resolutions in Brussels. Assets of investors, hedge funds, insurances and banks – that are now governmentally protected – face these bank debts. The taxpayer is liable instead of politics insisting these assets be made liable. The public treasuries support property assets whose owners didn’t have their headquarters in the EU and not only dubious investment banking. This means European taxpayers are responsible for those who don’t pay their taxes in a member country of the Union.
The close interlocking of banks with the shadow-banking system whose order of magnitude surpasses many times over the visible banking system makes the game with debts and assistance more dangerous than all numbers known to the public. [4] However European politicians counter possible loss-risks with the appeasement that ESM guarantees are guarantees and so-called possible obligations, not direct payments. The possible sums are staggering. The state debts of the five crisis-candidates Italy, Ireland, Spain, Greece and Portugal amount to around 3.3 trillion euro.
Thus enormous sums could come to the creditors that would increase proportionately if several states and a series of banks went bankrupt… With such a breakdown, all the calculations presented up to now would be rubbish in one blow.
In short, the ESM only functions as long as none of the participants throws in the towel. That is a feature of snowball systems. Snowball systems last until too many parties want to see their share. In such a case, the system collapses all of a sudden.
THE COLLAPSE IS POSSIBLE
Such a scenario would be a true stress test for the ESM – which the EU obviously doesn’t dare simulate now. The crucial question is: what must be done to prevent such a collapse?
As the example of Greece shows, the EU states could not enforce a genuine joint-liability of the creditor banks in the past. Instead they only enabled banks to offset positions that they already write off – and for which they obtained high interests for years. For a long while, creditor banks did not have to make another contribution but were released from all liability. When they renounce on future gains, creditor banks have losses which they may have already “priced in” internally.
The present plans of the EU aim at something similar for all banks in the European zone. The European Central Bank (EZB) gives banks berth credits in volumes of a trillion euro at an interest-rate of one percent. The banks can give these credits to states and receive back more in interests. On this background, direct state financing by the EZB would be the more rational alternative – though it is not in harmony with the mandate of the EZB.
However the EU is not seriously interested in permanent reforms of the financial sector. Member states have agreed that banks must show higher capital holding rates. At the same time they grant banks extensions until the sun falls from the sky for the introduction of these rates. States have not considered a separation of the dangerous parts of the financial system like the independent trading of investment banks and their connections to shadow banks from the harmless parts,
The summit participants avoided discussing how big a bank may6 be for an economy. How a big bank can go bankrupt without destabilizing the whole system and dragging it to the abyss and how the deposits of customers can be saved in such a case were long unexplained.
REGULATION INSTEAD OF BANK SOCIALISM
The European governments persistently evaded all these questions in the last years. Instead they wore themselves out in trivialities and distributed tranquilizers - like introduction of a financial transactions tax. While it may be socially commanded, this instrument hardly makes today’s financial sector more secure. Firstly, the banks will hardly be dissuaded from their risky transactions on account of the comparatively trifling additional costs. Secondly, the volume of financial transactions may not decrease to a great extent if the proceeds of a financial transactions tax are cancelled.
An enclosure of speculative transactions is an urgent necessity as a fundamental structural reform of the financial sector. The present bank socialism must be ended as quickly as possible. The problem of the ESM is that the water will reach its neck – with a breakdown of one or several debtor states. No other creditor can leap in the breach as a so-called lender of last resort.
We are currently far removed from meaningful and permanent solutions. Thus the settlement plans that the American oversight authority obtained a few months ago from system-relevant banks will not prevent dangerous risks. These banks will also take high risks in the future in the certainty that they will be bailed out in case of emergency with the help of tax money. [5]
In Germany, people are obviously unwilling to draw the right lessons from the crash of the US investment bank Lehman Brothers. The 2010 restructuring law transfers part of the costs of future bank crises to the money-houses. But at the same time, it includes a considerable liability of taxpayers. No law in the past prevented banks from being “too big to fail.” Therefore the sheer size of money-houses remains a danger for the global financial- and economic system.
There is only one way out of the misery. To solve the continuing financial crisis, banks must be allowed to go bankrupt – instead of being supported with public funds when they commit fraud. Otherwise the vicious circle of indebtedness which presently keeps the European Union on its toes will not be broken. Only in this way can we win the end-game around the euro. Otherwise the motto is: Save yourself if you can!
NOTES
________________________________________
[1] Vgl. Oliver Grimm, Bankenunion: ESM wird nun auch Bankenhilfsfonds, http://diepresse.com, 2.7.2012.
[2] Vgl. Kenneth Rogoff und Carmen Reinhart, This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, http://www.nber.org/papers/w13882.
[3] Vgl. das Interview mit Hans Werner Sinn am 2. Juli 2012 im Deutschlandfunk, http://www.dradio.de.
[4] Vgl. Nicola Liebert, Rainald Ötsch und Axel Troost, Der graue Markt der Schattenbanken, in: „Blätter“, 6/2012, S. 83-90.
[5] Vgl. Großbanken machen in den USA ihr Testament, in: „Handelsblatt“, 3.7.2012.
For more information:
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