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Europe is a real mess

Sunday, October 5, 2008, 7:11 PM

The surprising finding to me in all of this credit crisis mess has been that Europe was, if anything, slightly more relaxed in their regulatory approach than the US, and their financial institutions even more leveraged.

Quote:
Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed.

"We are at imminent risk of a credit crunch. Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too," he said.

Data from the IMF shows that European banks hold 75pc as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US.

Link (Telegraph) 

The big news tonight is that Germany had to effect an emergency bailout of one of its larger institutions this weekend AND announce that they were going to guarantee all individual German bank deposits.

These are enormous moves and prove that Europe is in no better condition than the US.  It makes me wonder if part of the move down in the Euro isn't a discounting of the possibility that the Euro might break apart under all this strain.

Quote:
LONDON (MarketWatch) -- Germany became the latest, and by far the biggest, European country to explicitly guarantee the deposits in banks held by their citizens, in a move announced Sunday.
The guarantee of private deposits came just hours before German officials set up a 50 billion euro ($68 billion) bailout of troubled commercial property lender Hypo Real Estate aimed at avoiding broader damage to Europe's largest economy.

German Chancellor Angela Merkel said she could not allow problems surrounding Hypo to affect the broader system.

Ireland and Greece moved to back bank deposits last week, and the cap on insured deposits in the UK is being raised to 50,000 pounds ($88,400) from 35,000 pounds.

Link (MarketWatch)

Right now the US futures market are down a bit more than 1.5%, indicating that the US stock market could continue its post-bailout sell-off on the open tomorrow.

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13 Comments

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Will European Deposit Guarantees Spur US Bank Run?

If the US guarantees only $250k per account but Ireland, Greece, Germany guarantee the whole shootinmatch, wouldn't that suggest a run over to Europe?

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Europe sucks up the Global Credit offerings

Just as a reminder, for those not thinking about it.  We, here in the United States will be in competition for every dollar Europe ends up borrowing over the next year.   

Also, so many banks are tied up in a crisscrossed way that a Europe bank collapsing is only going to be a little softer here in the States (and visa versa) than it is in Europe.

--

Steve 

capesurvivor's picture
capesurvivor
Status: Platinum Member (Offline)
Joined: Sep 12 2008
Posts: 963
European competition

So that would also be deflationary, correct?

 

SG

Mr.PR's picture
Mr.PR
Status: Member (Offline)
Joined: Oct 3 2008
Posts: 4
Germany is in a better condition?

Well, everbody in Germany thinks (well 99 of 100), that we are in a better condition. We have strong banks like Deutsche Bank and Allianz and government owned banks "Sparkassen" etc. All in a good condition.

HRE was the third problem in Germany. And: only the strange banks without any sense for risk and money mangement get into trouble.

Merkel gave this guarantee without legal background. I think its a fake. It was proposed just before new money was offererd to HRE and the first "bank run" news where spread.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Europe barfs after hot-dog eating contest

Why do euro banks hold all that crappy paper?

Simple answer: Bretton Woods II. They had to recycle the global dollar glut. And they was looking for yield in all the wrong places.

Needless to say, the KongressKlowns' $700 billion is now irrelevant. You might as well try to disable a tank with a plastic sword. Ms. Market has seen our $700 billion wager, and raised the pot to $700 trillion. Do ya feel lucky, punks?

Dr. M was right all along: the "end of money" caused this crisis; and only the end of [fiat] money will fix it. But not if John Law III (Weimar Ben) and his henchmen can stop it.

Chance of crash (circuit breaker trip) this week: about 20%. Money mouth

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Fiat Money will never end

Fiat money will never end.   Anyone who thinks otherwise is horribly ignornant.    Its fiat money or barter, and barter makes fiat money look good. 

(Gold backed cash, is still Fiat money.  Besides, a gold standard is probably dangerous now.   Gold was a favored backing because it had no legitimate use.   It is now craved by the electronics industry and as a catalyst for various chemical reactions.  In otherwords, gold has lost one of the aspects (extremely low volatility) that made it so desirable in the begining.  Also, lets not forget we killed the gold standard because we never bothered to follow it in the first place.)

At most, this'll get us a new paper note (at this point, the dollar may still live, believe it or not).   Hopefully it'll come paired with greater restrictions on the various Central Banks making it harder for them to legally print money in the future.

--

Steve

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Inflation/Deflation is on the Fed's table

Whether we see inflation or deflation on the short term is completely in the Feds hands.   Only they have the power to print money, and only printed money will create powerful enough inflation at this stage.  (Short of oil peaking, and then production crashing).

The Fed is currently strongly inflationary, however debt destruction is overpowering this in the short term (all that inflation will make it eventually.)   More European debt does, yes, create a more deflationary senario.

(I've said it before, and will say it again.  That deflation due to debt destruction and inflation created by money printing are very different beasts.  Inflating via monetary printing will not fix the destructive effects associated with deflation.).

--

Steve 

vegas316's picture
vegas316
Status: Member (Offline)
Joined: Aug 13 2008
Posts: 15
Printing money vs deflation
[quote=srbarbour]

(I've said it before, and will say it again. That deflation due to debt destruction and inflation created by money printing are very different beasts. Inflating via monetary printing will not fix the destructive effects associated with deflation.).

[/quote]

 Why don't you think so?

miranda's picture
miranda
Status: Bronze Member (Offline)
Joined: Apr 29 2008
Posts: 28
Printing money vs deflation
Yes, I have the same question.
Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3200
bank run
My guess is that there are few accounts over $100K because that was, until last week, the limit on FDIC insured accounts.  Further, there aren't many people who don't undestand that the way to avoid that limit is to open accounts in different banks.
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Printing money vs deflation

The simple answer is that printing money cannot solve anything.   Its a net-zero action.

Think of it this way.  Imagine the Fed had a magic faerie wand that if it waved it, it would cause every dollar bill in your wallet to divide into two, likewise for all your bank accounts, all your debts, and all prices.

Perfect 100% inflation.   The effect?  Numbers are bigger.  

Of course, in reality printing money is a tilted system.   That is, some individuals (usually banks) get the printed money before prices have adjusted to its existence (presumably, in Germany prices would rise in anticipation of the printed cash).   Because of this those who get the money first: the banks win, and those that get it last you lose.

Ironically, printing money despite this, doesn't help banks much at all.   After all, fixed rate debts are always last to get the money (they can't adjust as per contract), meaning when the Fed is printing cash banks are simultaneously the first and the last individuals to lay their hands on it.

Still, the sum effect remains the same.   Disregarding the effects of tilting the system, the net effect is zero.

 

The complex answer is, I'm afraid, much more complex.   It first requires understanding that deflation, inflation, and the associated effects are quite a bit more divergent than many economic theories conveniently claim.   (This was proven by the mere existence of the 70s stagflation).

First it is important to understand that deflation is specifically the decreasing of prices and wages.   It, too, is a net zero system.   After all, if both prices and wages decrease affordability is the same.  (just as with inflation).   

However, there are a host of things economists associate with deflation:

* Job Loss

* Decreasing productivity

* Debt destruction

Because these are highly correlated (they often go hand in hand), there are a number of theories that state that 'Debt Destruction' 'Job Loss' and 'Decreasing Productivity' will magically go away if the government starts inflating.   Again, the mere existence of the 70s stagflation completely disproves these theories, however a number of economists have convinced themselves (much like they convinced themselves that the rising debt, and the housing bubble weren't concerns) that the 70s style stagflation was a special case which doesn't apply in ordinary situations...

Unfortunately, the truth is far different, and is so patently obvious that a child could point out the error in the logic.

First and foremost is the notion that 'Printed Money' will create jobs... For this, the only thing that needs be asked is: "Why would it?"  Indeed, there is no reason at all that it would create jobs at all.  Inflation is, again, a net zero system.  Because affordability is unchanged, no business can afford to pay additional employees.    In fact, this statistical conclusion can instead be traced to the typical cause of inflation debt creation which does generally create jobs... as, debt is often taken to 'raise labor' for an immediate task.    

Next is consider Debt destruction.  Sure, if all wages double but house loans remains the same not as many debtors will default.  However, given the devaluing of the currency for the bank the result is the exactly the same as though half of all its debt defaulted paying zero, and half payed in full.   In other words, the debt is still destroyed, the destruction merely takes on a different appearance.

I won't go into the silliness of decreasing productivity, as it should be obvious that any 'increased yeilds' due to inflation will be offset be equalliy 'increased costs'.

--

Steve

johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
dollar vulnerability

the only buffer for the dollar is its broad circulation. I think the strength we've seen vs the euro may signal this circulation is deteriorating, as dollar based assets are deflating. This means holding gold is in effect holding hope for the civilized future. fiat currencies come and go; i agree they wont be gold based, but the amero currency and the silver price suppression lead me to suspect posible silver basis, among unexplained and severe price manipulation. we cant explain the extreme example of platinum prices, when there is NO SUPPLY. silver is a lesser example. Sorry, my point is the dollar is finished, and a new currency based on silver could emerge.

Inevitably, perhaps they could "pre inflate" a currency, where 100 amero's buys a tiny amount of silver...just having a quasi metals based currency could lend it the credibility it needs to get people to use it...that after all is what really matters...the faith of the people. unfortunately, we are seeing a mass mind, GLOBAL loss of faith in religion, institutions, and transparently corrupt corporations...meaning gold and silver will be all that people trust for the forseeable future.

johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
perhaps the base value of
perhaps the base value of assets is where the monetary inflation will be forced to go, through the government bailout process...thereby immediately consuming it as equity....leaving the defaulted debt as deflation as expressed, and the primary inititive of the economy..dollar strength.

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