Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again

Reggie Middleton's picture

So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"? reports:

lawmakers approved by a wide margin legislation to boost the scope and
size of the euro zone's rescue fund, in a major step toward tackling the
bloc's sovereign-debt crisis.

passed the reform of the European Financial Stability Facility with 523
'yes' votes, while 85 lawmakers voted 'no' and three abstained. The
vote was seen as a test of Chancellor Angela Merkel's center-right

17 euro-zone governments have to approve the expansion, which will
boost the fund’s lending capacity to €440 billion ($595.94 billion) from
€250 billion and expand its powers to allow it to extend credit lines
to banks and buy bonds on the secondary market.

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.


Interestingly enough, Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly fame contend "that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises".
If that is actually the case, then the very goal of the Euro project
was bound to bring about a sting of banking crises and all of this was
actually inevitable. As excerpted:


forgotten history of domestic debt has important lessons for the
present. As we have already noted, most investment banks, not to mention
official bodies such as the International Monetary Fund and the World
Bank, have argued that even though total public debt remains quite high
today (early 2008) in many emerging markets, the risk of

on external debt has dropped dramatically, especially as the share of
external debt has fallen. This conclusion seems to be built on the
faulty premise that countries will treat domestic debt as junior,
bullying domestics into accepting lower repayments or simply 12
defaulting via inflation. The historical record, however, suggests that a
high ratio of domestic to external debt in overall public debt is cold
comfort to external debt holders.

probabilities probably depend much more on the overall level of debt.
Reinhart and Rogoff (2008b) discuss the interesting example of India,
who in 1958 rescheduled its

foreign debts when it stood at
only1/4 percent of revenues. The sums were so minor that the event did
not draw great attention in the Western press. The explanation, as it
turns out, is that India at this time had a significant claim on revenue
from the service of domestic debt (in effect the total debt-to revenue
ratio was 4.4. To summarize, many investors appear to be justifying
still relatively low external debt credit spreads because “This time is
different” and emerging market governments are now relying more on
domestic public debt. If so, they are deeply mistaken.

this is actually the case, then what does it portend for China, whose
markets have seen unprecedented capital mobility and flows, and whose
banking system is tantamount to a hidden NPA factory sitting on top of
an inflationary economy teetering on the precipice of a deflationary

Inquiring minds may want to know, but proactive minds have been following BoomBustBlog all along.

The Complete Pan-European Sovereign Debt Crisis, forecast from the 1st quarter of 2010, complete with a detailed Greek, Portuguese and Irish default scenario(s).

of the French banking debacle, complete with prescient call of the
Franco bank run - culminating with the French bank most at risk:

have no doubt the French government along with the other 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. The fact
of the matter at hand is that they simply can't afford to bail them out.
I have predicted FIRE sector (including banks) failure at a commendable
rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?).
It's not rocket science, though. It's simply (and actually quite
simple, since my 10 year old can do it) math, coupled with a pliable
understanding of human nature couped in grasp of history. Listen, it was
the (attempted) bailing out of the banking system that got these
countries in this situation to begin with. Bailing out the banks just
two years later??? Do you really thing that will help the sovereign debt
situation or hurt it? If the bailout goes through, you eat the small
losses (relative to the big gains that BoomBustBlog delivered
subscribers) and roll your gains directly into bearish positions on the
bailing sovereigns. It's really just that simple. Don't believe me,
let's look at history...




 So, as I was saying...

the problems have not been cured, they're literally guaranteed to come
back and bite ass. Guaranteed! So, as suggested earlier on, download
your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models
(they range from free up to institutional), read the balance of this
article for perspective, then populate the assumptions and inputs with
what you feel is realistic. I'm sure you will come up with conclusions
similar to ours. Below is sample output from the professional level
model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)


A detailed and accurate picture of what is happening...

  1. Now
    That European Bank Run Contagion Has Started Skipping Across That Big
    Pond... US Bank Risk Stands Woefully Underappreciated!!!
  2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
  3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
  4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
  5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
  6. And The European Bank Run Continues...

A step by step tutorial on exactly how it will happen....

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks.
He must have watched the Keiser Report when it aired from late last
night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our
eye on you!

Go to 13:07 marker in the video, contrast and
compare and consider watching the smaller more independent shows for the
real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB
Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

VPRO Backlight and Reggie Middleton on brutal honesty, destructive
derivatives and the "overbanked" status of many European sovereign

VPRO Backlight and Reggie Middleton on brutal honesty, destructive
derivatives and the "overbanked" status of many European sovereign

I believe the next big thing, for when (not if, but when) European
banks blow up, is the reverberation through American banks and how it
WILL affect us stateside!
Subscribers, be sure to be prepared.
Puts are already quite costly, but there are other methods if you
haven't taken your positions when the research was first released. For
those who wish to subscribe, click here.

This bank has members of its peer group who have been identified as at
risk, but no one has pulled the covers off of this one as of yet. I
think I may blow the whistle. It will be a doozy, and a potentially very
profitable one at that since nearly 3/4 of it tangible equity is
embroiled in a region that looks like it is about to blow up. As I type
this, some of the puts have already doubled in price.
I will be releasing additional analysis on this bank this weekend for paying subscribers.

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falak pema's picture

It all involves two things along the line :

1° If no real growth, then debt will have to be reduced from books. Over time. Haircuts all along the next thirty years. But this means that interest rates are NOT dictated by ponzi markets but by central banks. So markets have to be regulated to keep investment alternatives aligned. Is this possible ? Big question. According to RM and BK : No! ...So lets see but if historically markets always win then the hair cuts will have to come soon. Austerity faster!

2° Try and create real first world growth to generate new revenues. Tough in current situation. Will the BRICS buy first world debt to kick start first world? Big question....Most likely not! Structural asymmetry big problem.

3° Can the first world create growth by paradigm change? It'll not be before five years at best! Can we hang in there and withstand the debt strain? I think the Eurozone is in better shape than the USA...But I may be wrong. What is the real debt including derivatives unwind in USA 15T or 200T?...And in Eurozone? 13T or 25T?


OC Money Man's picture

I value Reggie's research, but I believe there is method in the Germany's madness.  


The concept that seventeen independent rich and poor European countries could come together in a monetary union and perpetuate the “euro” currency has always been a fraud.  The real story behind the formation of the euro was the “Grand Bargain”.  The governments of the PIGS (Portugal, Italy, Greece, and Spain) receive colossal bribes in the form of the ability to borrow unlimited amounts of money at the same low interest rates the Germans pay; for agreeing to buy enormous amounts of German goods.  The PIGS generously performed their side of the bargain.  It is the Germans that after running-up vast surpluses are now economically destroying the PIGS by terminating the bargain.         

The European sovereign debt crisis did not start 18 months ago when Greek borrowing costs began rising from 3% to the current 75%.  The crisis began in 2009 when German politicians passed a constitutional balanced-budget “Golden Rule” at the height of the global credit crisis.  The Golden Rule prohibits German politicians from passing a budget with a deficit of more than 0.35% of Gross Domestic Product (GDP).  This was a radical departure from the unenforceable “Stability and Growth Pact” of the seventeen nation euro that limits deficits to 3% of budgets. 

For a monetary union to be sustainable, it must be operated on the basis of ‘symmetrical obligations’ among the members.  Germany’s decision to cut-off spending of its trade surpluses to finance the PIGS trade deficits has created a deflationary spiral in Europe.  Over the last two years there have been numerous incremental European bail-out programs aimed at stopping the Greek debt crisis from spreading to the other PIGS.  Each successive program forced deeper “reform” cuts to PIGS spending.  “No reforms, no bond purchases” has been the message of the German controlled European Central Bank (ECB) and the German controlled European Financial Stability Fund (EFSF).  Following periods of short term relief, each program failed.

Every year there are a numerous countries that get into financial trouble.  The usual answer is to devalue their currency to become more competitive.  This creates lots of pain for holders of country’s debt; but quickly the nation becomes a “cheap” tourist venue and eventually businesses start relocating to the country to enjoy “cheap” labor.  The PIGS have lost this option.  It still costs virtually the same amount to stay in a nice hotel and enjoy a cold beer in Athens as it does in Berlin.  Without the ability to devalue their currencies; the PIGS are being forced to increase “austerity” reductions in government spending to satisfy the next ECB or EFSF bail-out. 

The introduction of the euro currency was sold to the citizens of the PIGS as an opportunity for economic “convergence”; whereby Portugal, Italy, Greece, and Spain would benefit from learning how to be as competitive as Germany.  But in the nine years since the euro launch the PIGS have suffered 30% losses in competitiveness to their northern neighbors.  This has destroyed hundreds of thousands of private sector jobs.  The increasing austerity requirements of the bail-outs in Greece have resulted in an addition 20% cut in public sector jobs. 

With job shrinkage accelerating in the PIGS; it is only a matter of time before rising protester violence forces these nations to quit the euro and bring back the Portuguese “escudo”; Italian “lira”; Greek “drachma”; and Spanish “peseta”.  In the perfect world of an orderly devaluation, the losses to bondholders and banks would be approximately $3.5 trillion and make 70% of European banks insolvent.  But the history regarding devaluations has been one of chaos and violence.  In a disorderly devaluation the losses will run closer to $6 trillion and 85% of European banks will be insolvent.

The euro was never sustainable concept and the German Golden Rule has now accelerated the destruction of the Portuguese, Italian, Greek, and Spanish economies.  There is a lesson for Americans to learn from this European wipe-out.  Those who live on borrowed money; will eventually die by borrowed money!        

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Börjesson's picture

Whatever are you talking about? This whole post is a big charge at a self-built strawman. The German vote today had nothing to do with the absurd bailout talks of the last few weeks. It was just a passing of a bill suggested back in July. (Democracy works slowly.) The extra EFSF funds now approved by the Bundestag are (semi)real money gathered from various EU governments (mostly Germany, as usual), and not newly printed QE-style fairytale money. Nobody, and least of all the Germans, expect these paltry 440 billion euros to save the world. Now, if the Bundestag were to actually go along with the mad new scheme to leverage this money up to 2 trillion by creating the missing 4/5ths out of thin air, then this post would be relevant.

Volaille de Bresse's picture

And let me restate the obvious : Reggie's (and his puppeteers) plan is to tear the Euro apart to save the USD. This plan is both hopeless and childish...

Do you REALLY thnik the Chinese and the Arabs of the Gulf will run to D.C. and say "here are our savings"...?

AnAnonymous's picture

So cheap propaganda. So this negro would have enough credibility to tear the Euro to save the USD in this US world order?

US world order rule:

A blue eyed blond man spitting cheap propaganda is extremelly more likely to be believed than a negro coming with his well prepared, hard fact based analysis.

Why would so called US puppeteers waste their time on that pure blooded negro? If anything, if hired, they have hired him to discredit factual analysis as in this US world order, US citizens would turn away from him and his message on the mere assumption of his skin colour, not bothering to know if the message makes sense.

This is a US world order and if indeed, there were puppeteers, they would have picked better choice to try and destroy the Euro.

Zero Govt's picture

Brilliant Reggie

I'd like to join the Short-Banks, Laugh & Profit from their Deserved Demise Strategic Investment Fund you're running but I'm still having a retarded time trying to get through compliance issues (the red tape produced by morons/lawyers behind Govt desks that the Western World is drowning in) to get a fuking stockbroking account open!

Note. if anyone knows of a jurisdiction where compliance (hate that weasel word) for a company trading account is eazy peazy please let me know. Many Thanks

Politicians are throwing good money after bad (the bad mistakes of dumb/corrupt bankers and politicians). You cannot 'solve' past mistakes/frauds/bankers bonus/ponzi schemes by throwing new money at it. It changes nothing, certainly not the mistake or its costs. 

Nor does printing more currency (money is a measure of productive wealth and a unit to exchange it) change anything except to devalue each currency unit already in circulation. Central Banksters and politicians 'QE' program (a program to print counterfeit wealth) are in effect robbing/defrauding the productive of their held value in order to bailout the destructive acts of the unproductive (bankers and politicians consume others wealth/productivity) and indeed keep them in business

..the stupidity of 'throwing good money after bad' is made real in Govt every day. It is the biggest institution for productive wealth to be destroyed ever devised in history. The parasites (is Rothchild around?) have got a stranglehold on our units of exchange and are robbing us which is precisely what the monopoly money system was designed to do.. the Bank of England, ECB and US Federal Reserve are designed from the get-go to suck

...there will be no end to this socio-economic thieving and robbery by politicians and banksters and continual rape and impoverishment of nations by these cheatering crimnals of society until we rid ourselves of 2 monopoly institutions ...Government and Central Banks (global monopolists Visa and Mastercard will fall shortly thereafter)

Volaille de Bresse's picture


So Ponzi schemes are a European thing *because* Mr Ponzi was Italian? Brilliant...

How about the "August 1971 Nixon" scam (a 100% American name btw). We print USD till we puke, and we give the monkey money to you saying "the dollar is our currency but it's YOUR problem". 


A reminder : the US debt is 200 000 Bil, not the 14 000 you see on TeeVee...

Outlaw Of The Wasteland's picture

when will moody's be told to downgrade germany and france? 

That info will be worth billions to the headline printers.

Steroid's picture

I find it strange that you show "0" for the number of defauls for the US.

The financial history of the US during the XXth century was a string of defaults.

My feeling is that when one is at the bottom of the cesspool it doesn't really matter what is going on at the surface until all the liquidity dries up.

Winston Smith 2009's picture

They're all smoking Hopium.  That leads to short term memory loss. They already have a permanent case of long term memory loss.

MarketTruth's picture

Reggie, you are WRONG! Solving debt problems with more debt is logical. Just like telling all fat people that to lose weight they need to eat more donuts.

/sarc (obviously)

Years old video, yet still relavant
Fred Thompson on the Economy

stev3e's picture

Actually, it is more like telling fat people that they need larger clothes and a new attitude in order to deal with their obesity.

And it works - just take a stroll around the US.

disabledvet's picture

Let's be clear what doesn't work first: directly transferring what's on the bankrupt bank's balance sheet to the government ala Ireland. That didn't involve a single penny in Irish euro's and it bankrupted Ireland INSTANTANEOUSLY. So now let us imagine in "in the universe of OH SHIT!" what options there are. Hmmmmmm. Don't overthink this! That's right: there are only two. One is "let that bank phuckin' eat it." that solves a LOT of problems because "all that bad debt dies with the bad bank." of course the debt holders bite the big one so "there's some squawkin' on squawk box." the only other option of course is exactly what Paulson and Treasury did--basically the "hey so called rich phucker, how you need a loan beach?" it's for that reason (among many others) that I think the Paulson Plan worked. The state still functions...the state wins...and now they put an eye right on the clowns who can't run company, insurance company, investment management company and bank. In short the government shows as incompetent as wall street was and still is the same is not true for "those poor underpaid g-men." can they afford the city in which they reside would be a good place IMO to start "mastering the universe" again since no one is claiming DC can't. Anywho my only beef with the euro-landers (who have great polities IMO) is pretty simple: fiddle-phuckology to coin a term. They know what to do and they know the consequences for not doing it. By all means explain to the world how they're better than that!

The Big Ching-aso's picture

The debts are manageable.   It's the payments that aren't.

NEOSERF's picture

$190b euro increase...really?...this is the big god they are in trouble as SocGen alone could soak that up in a bad weekend.

Volaille de Bresse's picture

"You can't solve an indebted nation's debt problems with more debt""


Why not? It worked fine with the U.S. since 1971! Why should the U.S. of A. be the sole country that get away with this kind of scam? Do they have a trademark on Ponzi schemes?


Reggie I'm all ears!

JOYFUL's picture

Do they have a trademark on Ponzi schemes?


prolly not...they just overdid it on the Ellis Island welcome mat thing...

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy he became known as a swindler in North America for his money making scheme.

One of yours? Oh, I forgot, you're all "Europeans" until it's expedient to disown the cousins....


heavy heavy allotment of Eurotrash troll here on ZH today...more empirical evidence to back Reggie's "wild" speculations...


AnAnonymous's picture

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy he became known as a swindler in North America for his money making scheme.


Stupid. US citizenism is first and all a state of mind. Possibly, it is backed up by a specific configuration. Cultural indoctrination plus appropriate genetic make up is what makes a US citizen.

Charles Ponzi was by all measures a US citizen. He had the US citizen mindset and possibly the genetic make up. His talent took its full potential in the US.

Being born in the US is moot. Just like claiming that the founding fathers were not US citizens because they were not born in the US.

US citizens are full in control of the Earth, in the Americas, in Europe, in Africa, in the middle east, in partly in Asia. Only in places like China you meet people who are in power and not US citizens.

This is a US world order, dominated by US citizens and fashioned to satisfy their needs.

That is the way US citizenism is.

Diogenes's picture

Since 1933 you mean. Nationalizing the peoples' gold was the first step in the Ponzi. They shut the gold window in 71 because by that time the debt was so overwhelming there was not gold enough to cover the withdrawals. Even though only a tiny fraction of dollars was being cashed in for gold.

AnAnonymous's picture

Nationalizing the peoples' gold was the first step in the Ponzi.


No. The colonial century and the expansion of the US onto Indian lands, leading to bid there would have be more Indian lands to invade and take over was itself a Ponzi.

When this Ponzi matured after the last bit of the Indian land was transfered, it led to the Great Depression.

The US has been built on Ponzis.

Ghordius's picture

yes, but you can argue that in 71 the "pure fiat" USD was born

between 33 and 71 at least in theory it was somewhat backed by gold

IAmNotMark's picture

It HAS worked since 1971.  How much longer does it keep working?