Saturday, December 3, 2011

The US Cavalry Arrives

   In the last month or so, European banks have had trouble getting loans, especially ones in US Dollars. In essence, US financial institutions were voting "no confidence" in EU banks-- not unrealistically given that European banks are very badly overleveraged and have heavy exposure to Greek and other types of scary debt. According to an article in Forbes magazine, Wednesday nite there was a very large European bank that was unable to meet their USD denominated obligations the next morning. Zerohedge believes the bank was the giant French bank Credite Agricole, a bank roughly the size of Wells Fargo and Citibank. The last time an institution of anywhere near this size went under, it was named Lehman Brothers-- and Lehman was about a third the size Agricole is. Needless to say, something had to be done, and quickly. I have no doubt that Ben Bernanke did not sleep that night.

   On Thursday morning, Bernanke's Federal Reserve acted, in coordination with other central banks, to provide nearly unlimited loans to the ECB (which then loans to EU banks like Agricole). Over the next year, EU banks will need to roll over $2 trillion in USD denominated debt. Bernanke's action provides the ECB with access to US dollars needed to do this rollover. This action will also allow European banks to continue on, though not really saving them. It will help European banks lend to businesses and individuals-- which over the last month had been greatly constricted. 

  This action does not make any of them any more solvent than they were before mind you, nor does it make European nations any more solvent or less indebted than they were before this-- The Fed is just loaning them money nobody else will. The problems behind this interbank lending freeze are still with us. All this action really did was replace normal US bank lending to European banks with the Fed lending to them via the ECB. 

  There is a new plan afoot to deal with the European insolvency issues. This one was leaked to the media mid-week, and it involved the IMF providing huge loans to the {badly underfunded} EFSF, Europe's yet to be born rescue fund. But on Friday, US Senator Tom Coburn {R-OK} got whiff of this plan and promptly announced that he was going to introduce legislation into the defense appropriations bill that required US Congressional approval before allowing US participation in an IMF bailout of Europe. If this passes in the defense appropriations bill, it will be the kiss of death for any large scale IMF participation in European bailouts. Madame Lagarde at the IMF must be fuming and will no doubt give Coburn an earfull of threats of The Abyss, with US Treasury Secretary Tim Geithner assisting. Coburn won't budge an inch. "We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending ?"

  There is a meeting on 12/9 to finalize yet another EU rescue plan. This will be the sixth or seventh such rescue plan this year. Unless Germany magically agrees to let the ECB print money like a monsoon or agrees to the Eurobond {exceedingly unlikely, despite the pressure being put on her to do so} this meeting will also be a failure. Germany's answer is for these nations in trouble {namely Italy and Spain} to balance their budgets before Germany coughs up huge amounts of money-- a reasonable proposal. The problem is, balancing the budget is politically impossible for either Spain or Italy. I look for more of the same from this meeting-- a big number to wow the press, but precious little in the way of hard facts. 

  Lets give Bernanke credit this week for a stick save of the European banking system anyways. Given the ugly opposition Coburn displayed on Friday and the political cost to Obama when it gets out that we're possibly bailing out Italy, some are saying that Bernanke's artillery has run out of shells. I say never underestimate a desperate banker's willingness to print money and bypass the laws of the land. It's a weird irony that the ECB, which does follow their laws, is being bailed out by a central bank that shamefully obeys no one.


  1. wise woman in hidingDecember 3, 2011 at 9:28 PM

    I look forward to reading your commentary. You are a person possessed of a fine sense of what is happening in the world without imparting your personal political bias.

    What I as a lay person and non-trader get out of all of this is the missing sense of 'sacrifice' as it once applied to people and nations. Were we to be fighting WWII again, I doubt you'd find any here at home or anywhere in the world willing to forgo their selfish interests for the 'common' good. We are seeing the result of the narcissistic society worried solely about greed, glitz, and graft. In the end, the powers that be will continue to pull the wool over the sheep's eyes for as long as they can until they realize there is no grass left to feed on and all begin bleating at once.

  2. I chime in with the previous commenter on all counts.

    "never underestimate a desperate banker's willingness to print money and bypass the laws of the land"

    They probably believe that they are the law of the land. Given more time, it can be formalized in statutes, if it makes anyone feel better.

  3. Wise Woman & Kimo: I also think we're heading for a bad time, likely caused by the European mess or a crash in Japan. Here's my glimpse of life after the banking system crashes:

  4. Mr K who will bail out the Fed? That is when TSHTF.

  5. I hope it is not too cold yet in the Minnesota. We are suffering with lows in the 60's and highs in the 70's in Orlando. I love it this time of year, but the summers are unbearably hot and humid.

  6. Great article. Nothing was solved and no one will discuss that this was basically bailing out a or some European banks. Funny and sad at the same time we will break our own laws to bailout a foreign countrie's banks. Trying to be objective what would have happened to our banks if it failed? Something most of us could only imagine.

    Now are the taxpayers on the hook for more money that was loaned to Europe? This really bothers me as we have high unemployment with a poor outlook to get a decent paying job, more food stamps, and more and more homes under water. While our country people suffer they go bailout another continent. Criminal indeed.

    The Fed stated this morning they would continue to bailout Europe dispite Congress. This is indeed getting uglier everyday.