It's the banks, stupid

[Democracy Simulator]

I was pleased to read an excellent article by Liam Halligan in the Telegraph today, about the 'real' problem in Europe. While the focus of the media is on the potential break-up of the Euro and the plausibility of various bailout packages, very few commentators have had the guts to tackle the issue that is festering at the heart of Europe and the Global financial system - the insolvent zombie banks that are acting like a brake on any possible recovery. Halligan writes:

The most significant financial problem we face, in the UK and Europe, is that our banking systems remain gridlocked, with banks doing everything possible to conceal tens of billions of sterling and euro losses.

All those non-performing loans, and Toxic debts, many of them property related, haven't gone away. We don't know their precise scale because the banks still won't publish full sets of accounts, including their "off balance sheet vehicles"? And, disgracefully, governments and regulators have been too scared to force them.

http://www.telegraph.co.uk/finance/...Europe-languish-in-a-zombie-bank-malaise.html

Halligan goes on to suggest that until we get 'full disclosure' of the losses hidden in the banking system and a coherent plan to deal with insolvent banks, little progress can be made to implement a lasting economic solution for the Euro area and beyond.

The general clamor from the media, from economists, politicians and bankers, is that banks need to be recapitalized and bailed out at all costs and we are now seeing the next round of bailouts being lined up for the Spanish banking sector. I would suggest that any further taxpayer-backed bailouts of financial institutions should come with very large strings attached, as per the bailout of the Swedish banking sector in the early 90s.

The situation whereby one sector of economy theatens Armageddon if it is forced to recognize losses and operate with transparency is a deeply unsatisfactory state of affairs and one that is retarding any hope of recovery .

 

[Tatyana]

That is interesting as I listened to BBC Radio 4 Analysis today with a lecture by Steven Keen that was citing a very similar argument.

http://www.bbc.co.uk/podcasts/series/analysis
Steve Keen - why economics is bunk 4 May 2012
Mon, 4 Jun 12
Duration:
28 mins
Newsnight Economics Editor Paul Mason interviews the controversial economist Steve Keen before an audience at the LSE. Keen was one of the few who predicted the 2008 crash.

 

[Aber]

Halligan goes on to suggest that until we get 'full disclosure' of the losses hidden in the banking system and a coherent plan to deal with insolvent banks, little progress can be made to implement a lasting economic solution for the Euro area and beyond.

Except that much of this is posturing by those who don't like IFRS accounting for banks, being taken up by those who don't understand it at all.

There is probably more disclosure now than there has been ever before on the balance sheets of banks but there remain some other issues. I believe (from anecdotal evidence) that banks are being slower to take action against borrowers in trouble - the political fallout from shutting business down, and the problems of trying to sell secured assets in a recession mean the banks are playing the long game.

This means realisation of losses is being deferred and losses are uncertain, so capital is being held back to cover these losses. However it is also being held back due to worries that the euro crisis could end badly leading to a longer deeper recession. And regulators have insisted on higher capital levels. Therefore their lending capacity is less.

On the other hand demand from businesses for loans is reduced as they are doing the same - keeping cash and flexibility incase there are more rainy days.

All this means that the economy is not behaving like it did up to 2007 when it was being driven by cheap borrowing (and for which the bank regulators have mostly escaped censure).

 

[kevsta]

I was pleased to read an excellent article by Liam Halligan in the Telegraph today, about the 'real' problem in Europe. While the focus of the media is on the potential break-up of the Euro and the plausibility of various bailout packages, very few commentators have had the guts to tackle the issue that is festering at the heart of Europe and the Global financial system - the insolvent zombie banks that are acting like a brake on any possible recovery. Halligan writes:

http://www.telegraph.co.uk/finance/...Europe-languish-in-a-zombie-bank-malaise.html

Halligan goes on to suggest that until we get 'full disclosure' of the losses hidden in the banking system and a coherent plan to deal with insolvent banks, little progress can be made to implement a lasting economic solution for the Euro area and beyond.

The general clamor from the media, from economists, politicians and bankers, is that banks need to be recapitalized and bailed out at all costs and we are now seeing the next round of bailouts being lined up for the Spanish banking sector. I would suggest that any further taxpayer-backed bailouts of financial institutions should come with very large strings attached, as per the bailout of the Swedish banking sector in the early 90s.

The situation whereby one sector of economy theatens Armageddon if it is forced to recognize losses and operate with transparency is a deeply unsatisfactory state of affairs and one that is retarding any hope of recovery .

I would say you really need to get your news from more progressive organizations, there is not a single analyst I follow who has not been saying this over and over and over again since the end of 2009. Steve Keen is one of them btw.

this unpayable debt has to be purged worldwide before any real recovery is possible, and this is globally, not just the UK.

Try Reggie for more informed numbers based analysis.

how Greece killed its own banks (2010)

how the sovereigns killed their banks and why nobody realises they're dead yet

3+3=2 as big US banks amass trillions of dollars of risk with $50 of exposure

if you can put up with his self promotion he's one of the best. if I was as good as him I would also be really full of myself.

 

[aleCcowaN]

About Spain's bank crisis, this new video by Aleix Saló (English subtitles) :

 

[Democracy Simulator]

Except that much of this is posturing by those who don't like IFRS accounting for banks, being taken up by those who don't understand it at all.

There is probably more disclosure now than there has been ever before on the balance sheets of banks but there remain some other issues. I believe (from anecdotal evidence) that banks are being slower to take action against borrowers in trouble - the political fallout from shutting business down, and the problems of trying to sell secured assets in a recession mean the banks are playing the long game.

There seems to be plenty of evidence from Spain that the banks there have been kicking the can down the road in the hope that assets will return to their boom values. Since 2008, whenever the banks are in trouble, the rule seems to be that losses are always worse than first predicted and the problem is usually greater than the government or the banks anticipate.

This means realisation of losses is being deferred and losses are uncertain, so capital is being held back to cover these losses. However it is also being held back due to worries that the euro crisis could end badly leading to a longer deeper recession. And regulators have insisted on higher capital levels. Therefore their lending capacity is less.

Aren't these signs of a zombie banking system?

 

[theprestige]

the insolvent zombie banks that are acting like a brake on any possible recovery

How exactly would redoubled emphasis on the weakness of the banking system speed up recovery?

The banks have a problem, sure, but I'm not convinced that a thorough, public inspection of the extent of that problem will make recovery any likelier. I think it'd probably guarantee an accelerated collapse with no hope of mitigation.

Probably our best bet at this point is to drag the whole banking mess out as long as possible, giving other institutions plenty of time to bring other resources to bear. Forcing a full accounting now would probably ruin the whole thing.

 

[Democracy Simulator]

I would say you really need to get your news from more progressive organizations, there is not a single analyst I follow who has not been saying this over and over and over again since the end of 2009. Steve Keen is one of them btw.

this unpayable debt has to be purged worldwide before any real recovery is possible, and this is globally, not just the UK.

Perhaps I should have said very few 'mainstream' commentators have had the guts to take this issue on. I am aware of and appreciate some of the more 'progressive' voices you may be hinting at, including Reggie/Zero Hedge/Denninger/Max Keiser etc., but it is good to canvas a balanced selection of views.

If I could characterise the breadth of views on the subject, there seem to be two poles:

1. Save the banks at all costs, endless bailouts, put the taxpayer on the hook, debt must be repaid, etc.
2. The banking system is f***** and irreparable and we are heading towards the unravelling of the global financial system. Let's all buy gold and ammo and run for the hills!

I think the truth lies somewhere between these two extremes. Unfortunately for us humble peons (and I speak for myself if you are not one), the powers that be seem to consist almost entirely of people with view 1, who are very inflexible in their thinking and approach to the situation, almost certainly because their edifice of power rests on the assumption that the rules of the game are not going to radically change. Perhaps this fact actually makes scenario 2 more likely?

 

[Democracy Simulator]

the insolvent zombie banks that are acting like a brake on any possible recovery

How exactly would redoubled emphasis on the weakness of the banking system speed up recovery?

The banks have a problem, sure, but I'm not convinced that a thorough, public inspection of the extent of that problem will make recovery any likelier. I think it'd probably guarantee an accelerated collapse with no hope of mitigation.

Probably our best bet at this point is to drag the whole banking mess out as long as possible, giving other institutions plenty of time to bring other resources to bear. Forcing a full accounting now would probably ruin the whole thing.

So, the problem is that any attempt to fashion a solution to the problem (of zombie banks), recognises that there is a problem, which exacerbates the problem?

Oh dear.

 

[theprestige]

So, the problem is that any attempt to fashion a solution to the problem (of zombie banks), recognises that there is a problem, which exacerbates the problem?

Oh dear.

I'm just saying that I don't buy the overblown rhetoric in the article you linked, DS.

If Liam Helligan thinks thank forcing immediate full disclosure of the toxic assets in the banking system will somehow speed recovery, he's a ******* idiot. It would probably speed collapse, instead.

Whether or not we have any other option, or if there is a way to avoid collapse or enable recovery by not insisting on immediate full disclosure, remains to be seen.

ETA: I mean, really? If only we knew exactly how bad it really was, consumer confidence would return, investment would accelerate, and productivity would promptly rise?

 

[Democracy Simulator]

I'm just saying that I don't buy the overblown rhetoric in the article you linked, DS.

If Liam Helligan thinks thank forcing immediate full disclosure of the toxic assets in the banking system will somehow speed recovery, he's a ******* idiot. It would probably speed collapse, instead.

Whether or not we have any other option, or if there is a way to avoid collapse or enable recovery by not insisting on immediate full disclosure, remains to be seen.

ETA: I mean, really? If only we knew exactly how bad it really was, consumer confidence would return, investment would accelerate, and productivity would promptly rise?

Well, I'll let Halligan answer you:

Until now, the Western world’s response to “subprime” — a bank insolvency-led crisis — has been to follow the “Japanese model”. This amounts to covering up for the banks, allowing them to pretend they have assets they don’t, and don’t have losses they do, and then “praying for a miracle” that capital levels are somehow restored. History shows this model doesn’t work. It was only in 2010 that Japan’s GDP recovered to its 1991 pre-bust level.

Perhaps it is better to have short-term pain and clear out the insolvent institutions and bad debt from the system, so things can grow again? Might that not actually be preferable to a decade or two of stagnation?

 

[theprestige]

Well, I'll let Halligan answer you:



Perhaps it is better to have short-term pain and clear out the insolvent institutions and bad debt from the system, so things can grow again? Might that not actually be preferable to a decade or two of stagnation?

On the other hand, a decade or two of stagnation might be better than a decade or two of collapse. It's not like Japan was realistically going to grow its economy during that period, no matter what it did.

If the truth is as bad as Liam thinks it is, then telling the truth now, all at once, will cause consumer confidence to plummet. It will cause investor confidence to plummet. All hopes would be dashed. It wouldn't be short-term pain, it would be all-out panic. It would be disastrous.

Which, okay, fine. All that--global economic collapse--is a small price to pay, for telling the Truth. But what does the Truth actually get us? What is the actual benefit, except to Liam Halligan's affronted sense of justice?

I mean, unless the sudden revelation of the enormity of the malaise is accompanied by a sudden revelation of a pile of money so big and so believable as to wipe away all concerns about the position of the banking sector, what does a full revelation actually bring us?

 

[kevsta]

Perhaps I should have said very few 'mainstream' commentators have had the guts to take this issue on. I am aware of and appreciate some of the more 'progressive' voices you may be hinting at, including Reggie/Zero Hedge/Denninger/Max Keiser etc., but it is good to canvas a balanced selection of views.

ok good. didnt mean to patronise but lots of people on here wouldn't dream of taking in viewpoints that dont come from traditional media, and prefer to base their opinions on MSM blather.

If I could characterise the breadth of views on the subject, there seem to be two poles:

1. Save the banks at all costs, endless bailouts, put the taxpayer on the hook, debt must be repaid, etc.

2. The banking system is f***** and irreparable and we are heading towards the unravelling of the global financial system. Let's all buy gold and ammo and run for the hills!

I think the truth lies somewhere between these two extremes. Unfortunately for us humble peons (and I speak for myself if you are not one), the powers that be seem to consist almost entirely of people with view 1, who are very inflexible in their thinking and approach to the situation, almost certainly because their edifice of power rests on the assumption that the rules of the game are not going to radically change. Perhaps this fact actually makes scenario 2 more likely?

I am indeed a humble peon, and broadly agree with all of this, and lean heavily towards camp 2 without ammo or running to any hills.

I don't doubt the abilities or motivation of camp 1 to keep their status quo going longer than many people think possible, but I do doubt their ability to sustain the unsustainable forever.

 

[psionl0]

If I could characterise the breadth of views on the subject, there seem to be two poles:

1. Save the banks at all costs, endless bailouts, put the taxpayer on the hook, debt must be repaid, etc.
2. The banking system is f***** and irreparable and we are heading towards the unravelling of the global financial system.

Definitely 2 for me. The system is not irreparable but fixing it is politically difficult. It would only take a few relatively simple measures to ensure that the banks don't threaten to take down the whole economy if they get into difficulty.

It's the 1'ers who are determined to shut down any possibility of reform.

 

[Random]

On the other hand, a decade or two of stagnation might be better than a decade or two of collapse. It's not like Japan was realistically going to grow its economy during that period, no matter what it did.

If the truth is as bad as Liam thinks it is, then telling the truth now, all at once, will cause consumer confidence to plummet. It will cause investor confidence to plummet. All hopes would be dashed. It wouldn't be short-term pain, it would be all-out panic. It would be disastrous.

Which, okay, fine. All that--global economic collapse--is a small price to pay, for telling the Truth. But what does the Truth actually get us? What is the actual benefit, except to Liam Halligan's affronted sense of justice?

I mean, unless the sudden revelation of the enormity of the malaise is accompanied by a sudden revelation of a pile of money so big and so believable as to wipe away all concerns about the position of the banking sector, what does a full revelation actually bring us?

If they are zombie institutions, then they are going to drag us down for years and years. There is no real reason why we can't demand an accurate accounting, and if they are insolvent the FDIC can do what it always does, garuantee the indivual depositors up to the legal amounts, liquidate the shareholders, fire the management, recapitalize and sell it off. Yeah it leads to short term disruption, but it gets it out of the way.

It's like choosing between getting kicked in the crotch five times in a row, and getting kicked in the crotch once a week for a year. Yeah, five times in a row sucks, but you get it out of the way.

 

[tensordyne]

Definitely 2 for me. The system is not irreparable but fixing it is politically difficult. It would only take a few relatively simple measures to ensure that the banks don't threaten to take down the whole economy if they get into difficulty.

It's the 1'ers who are determined to shut down any possibility of reform.

Here, here! The 1'ers wanna get paid and do not want to see things change. That and we should not forget that many in the banking world broke the law!

 

[kevsta]

If they are zombie institutions, then they are going to drag us down for years and years. There is no real reason why we can't demand an accurate accounting, and if they are insolvent the FDIC can do what it always does, garuantee the indivual depositors up to the legal amounts, liquidate the shareholders, fire the management, recapitalize and sell it off. Yeah it leads to short term disruption, but it gets it out of the way.

ah capitalism, remember that?

 

[Evermind]

1. Save the banks at all costs, endless bailouts, put the taxpayer on the hook, debt must be repaid, etc.
2. The banking system is f***** and irreparable and we are heading towards the unravelling of the global financial system. Let's all buy gold and ammo and run for the hills!

3. The few megabanks are jamming up the system on purpose to put as much middle-class people into the lower class and take over as much smaller banks and institutions as possible. Finally the situation will be so bad, that the only option is to introduce a global currency, possible digitally. This is their longlasting plan on which they embarked before or during the creation of the United Nations.



Signs:

- multiple elitists have already proposed a global currency (like George Soros and many others)
- There are longlasting plans to merge the IMF and Worldbank, maybe around Bretton Woods II
- Rogue banks like Goldman Sachs etc. create crises on purpose. They set up unstable financial bubbles, which they know they will burst. They bet then against the bubbles and profit of other people's mistery.


There are dozens of other signs, will add them when I think about them. If everybody knows other signs, add them. And I mean no signs in the sky.

 

[The Don]

Signs:

- multiple elitists have already proposed a global currency (like George Soros and many others)
- There are longlasting plans to merge the IMF and Worldbank, maybe around Bretton Woods II
- Rogue banks like Goldman Sachs etc. create crises on purpose. They set up unstable financial bubbles, which they know they will burst. They bet then against the bubbles and profit of other people's mistery.


There are dozens of other signs, will add them when I think about them. If everybody knows other signs, add them. And I mean no signs in the sky.

As well as the "dozens of other signs" could you please provide some evidence to support the first three.

 

[Democracy Simulator]

For the record, I don't think that there is some overarching conspiracy as Evermind seems to believe. Of course there are probably plenty of shenanigans going on behind the scenes and if the 'Truth' ever got out, no doubt there would be a few surprises, but probably not of the Infowars variety.

Most of what we have been seeing since GFC 1 is the result of incompetence and greed, which the human race has in spades.