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Germany's Sophisticated Ignorance Doesn't Even Look Sophisticated Anymore
In Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, I stated:
This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredly bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong w.ords, strong words are necessary for a dire situation. Let's consider this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positions that the majority simply didn't have the foresight, temerity (or balls) to implement and hold on to.
The constant and consistent belief that Germany is a bullet-proofed save all is foolish at best. Germany lives in the same economic malaise roach motel as the rest of the EU, they simply rented the penthouse suite! Pushing them to build up more debt to push additional debt on over-indebted nations who clearly can't pay back their current debt is quite foolish. Recession and depression looms everywhere. As clearly articulated in the orginal "Sophisticated Ignorance" article...
This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.
Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the sovereign states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big.
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As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ultimately witnessing the private banks fail anyway.
I warned of this in the beginning of the year via my many proclamations on the FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly. We also warned in Deustche Bank as follows:
As derived and excerpted from 
Euro Bank Sovereign Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):
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What is the result of throwing pound after pound of leveraged fiat currency meat into the hungry maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...
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The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.
Well, look what we find in the MSM headlines this morning... European Banking Regulator Imperiled by Zombie Banks in Germany
Germany’s regulator balked last year when the European Banking Authority conducted stress tests on financial firms, objecting to the agency’s definition of capital and allowing one state-owned lender to withhold some results.
The refusal to go along with the European Union regulator reflects an aversion by governments to ceding control to a central authority that may doom talks about creating a banking union and thwart plans to shift the burden of bailing out Spanish and Irish lenders to other euro-area nations.
“Germany didn’t let the EBA dictate any terms to its troubled banks, why would it now hand over controls to a new regulator?” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk. “The prospects of a new central authority are shaky at best.”
EU leaders agreed in June to use common funds to inject cash directly into banks once a new regulator is established. Until then, Spain will be on the hook for as much as 100 billion euros ($123 billion) it may need to borrow to recapitalize its banks. That means increasing the public debt level, already strained by budget deficits, a second recession in four years and regional governments strapped for cash.
Well, you can't say I didn't tell you s, re: Spain...
- Surprise! Spain Makes The Same Ass-Backwards .. Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of ...
- You Have Not Known Pain Until You've Tried To Save Spain Jun 19, 2012 – The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels:Spain paid a euro era record price to sell short-term debt on Tuesday,
- Beware The Day When The Bulging Bunds Go Bust ... Jun 29, 2012 – Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority Euro-area leaders.
- The Economic Bloodstain From Spain's Pain Will ... May 31, 2012 – Those that regularly follow me know that although I'm quite the mediocre short term trader, I have uncommon strengths that lie in the realm of ...
- European Insurer Needs Insurance As $6B Of Its ... -Jun 11, 2012 – So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain .
- The Spain Pain Will Not Wane: Continuing the ... Apr 16, 2012 – Just over two years ago I warned that Spain posed a significant threat to the EU area economies. This was a very unpopular stance, and since ...
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But hey,
As long as you can buy swaps and make a profit, we can do this forever, right? While we're printing money, we'll just print up some insurance too.
What could go wrong?
Investing is easy.
The bank guy in Brussels is making a fatal assumption...that existing debt can continue to be rolled over with the issuance of ever-increasing sums of new debt that the investing public will continue dining on.
The Rubicon has been crossed, and we're long past the point of any "sophisticated policy responses" (i.e., the baffle them with b.s. modus operandi) having a chance to work.
The problem with the "sophisticated policy response" tactic is that future buyers of soveriegn debt have to believe they will keep getting repaid, without loss of principal or interest.
Such is NOT the current behavior as evidenced by the recent past and current yields of many Euro sovereign instruments. In fact, the current yields suggest an acceleratation (that's right, a positive second derivative) toward sovereign default as interest expense grows further and further out of control with every rollover.
Maybe, the headline should read "Euros continue to roll over before the final rollover."
....And when an entity steps in suddenly and declares there is a NEW priority to the bond repayment hierarchy, then who would put additional capital into the mess?
Your bonds were superior, and then they were subordinated. How can they expect anyone to deal with that? New bond are suddenly the top priority and all others eat shit.
Only a "Bank Guy in Brussels" could consider Japan's dynamics to be a model for Europe
"Such more complex responses are partly 'kicking the can', but, for example, Japan has kicked the can successfully for nearly a quarter century, without 'austerity' and raping the average Japanese ... and two decades of avoiding depression is certainly worth noticing."
Let's see:
Japan's demographics during the period was not inverted or going inverted; things are different now, but during the two decades referenced. This fact alone reveals anyone making such a comp, using such flawed data set construction and consistency, is at best an ignoramus. When a "banker" makes such an assertion, that they are seeking to deceive others is much more likely.
There's also that pesky little fact of Japan's culture being hugely different than Europe's "club med" nations. The influence by such differences on the trajectory of social and economic systems should be obvious to anyone with a mature and rational understanding of human nature and history.
Only a "Bank Guy in Brussels" could consider Japan's dynamics to be a model for Europe
"Such more complex responses are partly 'kicking the can', but, for example, Japan has kicked the can successfully for nearly a quarter century, without 'austerity' and raping the average Japanese ... and two decades of avoiding depression is certainly worth noticing."
Let's see:
Japan's demographics during the period was not inverted or going inverted; things are different now, but during the two decades referenced. This fact alone reveals anyone making such a comp, using such flawed data set construction and consistency, is at best an ignoramus. When a "banker" makes such an assertion, that they are seeking to deceive others is much more likely.
There's also that pesky little fact of Japan's culture being hugely different than Europe's "club med" nations. The influence by such differences on the trajectory of social and economic systems should be obvious to anyone with a mature and rational understanding of human nature and history.
"Let's walk through this so a 5 year old can understand it."
Would have read better if you replaced "a 5 year old" with "a 5th grader".
It's like a father who has a son with a gambling problem. As a father you can only bail him out of so many situations until he put himself in peril.
Some offspring have gambling problems, still others have consumer spending problems while others have job, health or pretension problems. Too many problems out there and not enough wealthy fathers.
Reggie wrote:
« ... Germany lives in the same economic malaise roach motel as the rest of the EU, they simply rented the penthouse suite ... »
That is funny. Indeed, right now, the Germans are having a 'You Can't Handle the Truth' moment. They actually sealed the doom of what Germans imagined was the 'hard money euro' years ago, when they let German banks above all, go on a giant credit-issuing bubble binge.
Regarding what Reggie says:
« ... the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ultimately witnessing the private banks fail anyway ... »
That is a tempting summary, with much truth in it. But it is still an over-simplification from a policy point of view. It is not so simple and stark as either liquidate the banks with bad loans, or destroy the sovereigns while delaying to liquidate the banks.
There are more complex and effective policy responses, as outlined in various ZeroHedge pieces, in the columns of Ambrose Evans-Pritchard, the writings of Richard Koo, and others ... Combinations of inflating and slow deleveraging.
Such more complex responses are partly 'kicking the can', but, for example, Japan has kicked the can successfully for nearly a quarter century, without 'austerity' and raping the average Japanese ... and two decades of avoiding depression is certainly worth noticing.
But it seems Reggie's perspective is more to profit from shorting etc. opportunities, rather than present some possibly policy fixes.
have you been to japan??? are you even suggesting japan could have survived the last few decades without a massive market for exporting and are you comparing the japanese position to that of the west now?
is america and europe going to suddenly find a massive mercantilist market that never existed for them? the west has NEVER benefitted from mercantilism. it has ALWAYS used their advantage of transportation and military power to structure trade around the world to deliver wealth to trading companies and banks.
the banks support the idea of decades more of financial repression to survive like japan on the assumption there will not be a massive breakdown and full scale impoverishment of society. and yet, we all know that a full scale depression is only being avoided by a massive growth in government welfare payments and more government spending. how does this play out when the government is stuck in a 0% borrowing pattern to save banks at a time when the government debt is simply too big to ever be paid back if interest rates rise.
it works like this----the banks are pushing the government towards an overnight devaluation of the currency. the BANKS, with the dumbass approval of big spending politicians of the 2 party axis---- are pushing the government to a scenario where it STEALS citizens savings. this isn't capitalism it is theft. banks do not support capitalism , they support theft of capital for the survival of the banks and the government. and should the government be too far gone, they will be happy to have the government default . the banks don't give a shit about anything but themselves. no institution does. and this unchecked selfishness explains hundreds of years of the historical pattern of bankers getting hung.
your idea of a policy fix is to steal. you want to talk about policy fixes? talk about a full liquidation of the big banks and a staged closing of the federal reserve bank as well as a complete reformulatino of municipal , personal, and corporate bankruptcy laws---of course, glass steagall needs to be re-enacted. and the richest people on wall street need to be arrested and placed in jail. to send a clear message to future bankers. and after all of that----they can close the sec, cftc, and shut down every 'agency' and just put ALL regulatory authority for all securities, derivatives, and paper instruments---in the treasury. no more acronyms.
Ouch,
Harsh dude, harsh...
Bank guy thinks stealing is okay as long as it's wee bites at a time over a 25 year period. Sort of like mosquito feed instead of lion lunch. By the way ...we prefer the term deleveraging over the use of theft. If you're whats for dinner, then presentation is important.
Who cares if the economy is the equivalent of 4000 bc. subsistence farming as long as the bankers don't lose a dime?
That's all that really matters. They work hard. You owe it to them.
Japan used to have savings with which to kick the can, sadly that is no longer the case. What has Europe in savings? Accepting this yoke of oppression from the bagholders is nothing more than accepting war reparations from 1918 all over again, Germany will not yield.
Oldie but a Goodie: http://www.youtube.com/watch?v=I5QwKEwo4Bc
Plad,
miss the old avitar btw, but watching that vid is like hearing "stairway to heaven" for the umteenth time. I was good but it seems to get posted at least once a week here.
regards