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Showing posts from June, 2012

That Barclays LIBOR-fixing matter......

Bob Diamond, CEO of Barclays, is fighting for his career.

The extent of the LIBOR-fixing scandal for which Barclays was fined by the FSA on the 27th June is still unclear: many other banks are thought to be involved - probably all of the LIBOR panel banks. Barclays was the first to admit guilt, and its fine was reduced by 30% because of this. However, the media furore since has cost Barclays far more than that: its share price dropped by over 15% after the FSA announced its findings, and there have been persistent calls for Diamond to resign. He has now been "invited" to appear before the Treasury Select Committee to explain Barclays'  behaviour.

Both Diamond's acceptance letter and the FSA report identify two quite separate and distinct forms of LIBOR-fixing. The first is the more widely reported, since it concerns the behaviour of traders - who everyone loves to hate anyway - and there are some salacious emails providing evidence of traders influencing LIBOR submit…

The money machine

The financial system is short of liquidity.

"What???" you say. "Despite the trillions of dollars that the Fed, the Bank of England, the Bank of Japan and even the ECB have been pumping into it through their various varieties of money creation? How can the financial system POSSIBLY be short of liquidity?"

Trust me, it is. But the conventional banking system isn't short of liquidity. The shadow banking system is. And this is a very serious matter, because the shadow banking system and conventional banking system are critically interlinked. If money stops circulating in the shadow banking system, it can't circulate in the conventional banking system either. The effect is that conventional banks end up awash with cash that they daren't lend out, and the shadow banking network grinds to a halt. Which is what is happening.

So why isn't money circulating in the shadow banking system, and why does this affect the transmission of money in the conventional ba…

A financial Nuremberg?

Ever since the 2008 financial crisis, there have been calls to bring to account the people responsible for the near-collapse of the international financial system and the subsequent worldwide recession. But very few have been prosecuted, either nationally or internationally. In individual countries, notably the USA, some have been convicted of fraud and further prosecutions are pending. But there has been no international action against the principal actors in this drama - the financiers, the politicians, the regulators, the auditors and the economists. Again and again we hear people asking why no senior bankers are in prison, why there is no enquiry into how the financial system came so close to collapse and why no-one has been prosecuted for causing such devastation across the whole world.

There are several reasons for this. Firstly, very few of these people have committed actual crimes under existing national or international law: endangering the international financial system isn…

The monsters of Spain

Anyone remember Too Big To Fail?

Ever since the financial crisis of 2008, there have been cries for large banks to be broken up. The idea is that no bank should be so large that it cannot be allowed to fail because if it did it would pose a threat to the domestic or international financial system.

So far no banks have actually been broken up, apart from some that failed in 2008 - Lehman and ABN AMRO, for example. But governments and regulators around the world have been looking at ways of limiting bank size (taxing liabilities, for example), ensuring that failed banks can be resolved quickly and safely, and promoting competition in the banking sector to reduce bank power by giving customers more choice.

Except in Spain. The Bank of Spain has taken the OPPOSITE view. Over the last four years it has promoted, encouraged and facilitated the merger of the regional savings banks - the cajas - into much larger conglomerates. Its stated aim is to reduce the number of cajas from 45 to 10. Tha…

The real tragedy of Europe

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This, courtesy of Pedro da Costa of Reuters:



This is a slightly more comprehensive chart than the one I used at the start of my post The European Disaster Story.

Spain's adult unemployment rate is now the same as the unemployment rate in the United States in 1933 at the height of the Great Depression. Greece will be at the same level or worse very soon. What a terrible waste of human life and potential.

This is the real tragedy of Europe.


The real bailout

According to James Mackintosh of the Financial Times, JP Morgan produced some figures today that showed where the money provided to Greece in its much-publicised bailouts actually went. Here's what James said on twitter:
"JP Morgan estimates only €15bn of €410bn total "aid" to Greece went into economy - rest to creditors. No wonder they are cross" No wonder indeed. The price they paid for those bailouts has been severe cuts in public spending and five years of deep recession. Their adult unemployment is now about 20% and their youth unemployment over 50%. And there is no relief in sight, only further cuts and deeper recession. The Greek economy is collapsing.

No prizes for guessing who the main creditors are, either. Banks, of course. This fun interactive graphic from Thomson Reuters shows which countries' banks are the most exposed to Greece and therefore, presumably, have benefited the most from the bailouts.

In the most recent bailout, of course, the pri…

How to bring down a bank

This, from a comment on Richard Murphy's blog.
a. If the EU lends money to the Spanish government it presumably then lends it to the banks.b. According to orthodox theory every debt liability has a corresponding assetc. If that is true the worst that can happen is that the transaction is neutral so far as Spain is concernedd. It seems possible that it could actually reduce sovereign debt depending on the interest charged on the loans to the banke. When Europe lends to a state it imposes conditionsf. It follows that if a state lends to the banks it can equally impose conditionsg. The state can therefore require that the banks use the money to repay deposits from ordinary people and money owed to pension fundsh. After that the banks can go hang, because it is those liabilities which blackmail us into helping themi. That money is then with depositors and pension fundsj. The state can then require them to give it to the state for use in rebuilding the economy There are numerous problem…

A really scary story

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There was a scary headline in the FT yesterday:

         "US BANKS FACE $60 BILLION CAPITAL SHORTFALL"

And the report went on to explain:

"The 19 largest US banks are at least $50bn short of meeting new capital requirements under the Basel III accords, according to rules proposed by the Federal Reserve.
The biggest among them would probably need billions of dollars more by the 2019 deadline to comply fully with the rules. Smaller US lenders are about $10bn short of the requirements, the Fed said on Thursday."
Terrifying. And complete rubbish.

These are capital requirements that don't come into force until 2019. The third paragraph of the report says:
"....most banks should be able to reach the new levels by retaining earnings during the next few years rather than by raising capital in the market". So NORMAL activity will be enough for most banks to meet the new requirements. No shortfall, then. Nothing to look at here. Move along, now.

But in trying t…

When trust is broken

This post is a follow-up to my post last year about risk and safety. In that post, I assumed that people who want or need safety trust their government to provide it. But what happens if that trust is broken?

Trust in government is the foundation of our system of nation states. People rely on government to defend the borders and provide a safe place for them to live, work and bring up children. More than that, people rely on government to create the prosperity they desire - either directly, through government spending programmes, or indirectly, through supporting and encouraging private enterprise.  And people - especially in the developed world - expect government to provide for them when they are unable to provide for themselves.

Trust in government is also the foundation of our financial system. Currency issued by a trustworthy government is regarded as risk-free. So is debt issued by a trustworthy government. Neither has any value if trust in the government is destroyed.

So what h…

Calling International Rescue

I've been arguing for quite some time now that the Eurozone crisis is a sovereign debt crisis and a banking crisis, a balance of payments crisis, a currency crisis and above all a political crisis. Most people now agree with me on the first two and maybe the third, but they still aren't seeing the crucial importance of the last two. So let me explain how I think this ghastly situation came to be and how I believe it will play out.

The creation of the single currency in 1999 created a market expectation that the debt of all Eurozone countries would be backed by the full faith of the whole Eurozone, irrespective of the strength of the issuer's economy. Because of this, smaller and weaker countries in the Eurozone were able to borrow at similar rates to stronger countries. Their debt was too highly priced and they paid too low a rate - so many of them borrowed far too much. And banks, for whom sovereign debt represented an unbeatable risk-free investment because (at the time)…

Zombies? What zombies?

In a recent post, I noted that insolvent banks need to be treated differently from illiquid ones. Banks that are basically solvent but suffering cash flow problems need to be provided with plentiful liquidity: banks that are insolvent need to be allowed to fail (with protection for depositors and essential functions). The problem is telling the difference. Bagehot advised central banks to "lend freely against good collateral at a penalty rate" to illiquid banks. Note his advice about collateral. That's how you tell the difference - if a bank's assets are poor quality and/or its balance sheet is already so encumbered that only its poorer quality assets are available for use as collateral, it is much more likely to be actually insolvent.

The same applies to businesses. It can be hard to determine whether a business is actually insolvent or simply suffering severe cash flow difficulties. Cash flow problems, if not resolved through timely application of sufficient workin…

When history speaks

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I wasn't going to do another chart-based post for a while. But I couldn't resist this one:



(h/t Steve Keen)

We hear a great deal about American public debt. And yes, it is a lot - it is now over 100% of GDP (this chart stops at 2011). And as numerous people have pointed out, it doesn't include future unfunded liabilities. The administration is under pressure to cut deficit spending, balance the budget and stop the debt growing - or even, ideally, start reducing it by running budget surpluses. The last President to do this was Clinton - you can see the effect of the "Clinton surpluses" on this chart in the latter half of the 1990s. Is this the right course of action now?

Well, from what this chart is saying, absolutely not. It would be completely counterproductive and might even plunge the US into a 1930s-style depression.

To explain why I think for the US to attempt to balance its budget is madness at the moment, it's necessary to analyse this chart. We know …