Thursday, September 15, 2011

Coordinated Central Bank Intervention to Save European Banking System

The Markets

Yes, matters in the European banking sector were getting just a bit panicky over the past few weeks; so much so that the world's largest central banks were forced to step in and provide liquidity to pressured banks across the European continent.

Striking like a lightning bolt, the European Central Bank, Bank of England, Bank of Japan, Swiss National Bank and the US Federal Reserve jointly vowed to provide three-month loans denominated in dollars for the remainder of the year.

With this move, the worlds inhabitants can clearly see that the empire of debt has now encompassed the entire planet, and not only do we have zombie banks in Japan, England and the United States, but now the major banking institutions of Europe have joined the club. France's Societe General and BNP Paribas, Germany's Commerzbank and Deutsche Bank are among the largest banks needing a fresh infusion of capital in order to service maturing debt and continue providing loans to the nations of Greece, Portugal, Ireland, Italy and others. Many of these same large banks and smaller ones already have been the recipients of US and Central Bank largesse in the past, receiving trillions of dollars in 2009 and 2010, when the financial contagion begun in the United States spread globally.

Oddly enough, this stunning development occurred three years to the day that Lehman Brothers failed, sending economic shock waves around the world, and it is proof enough that all Central Bank intervention, loans, guarantees, swaps and programs have not solved the fundamental problem facing most major banks and sovereign states: solvency.

Zombie banks, like Bank of America and Citigroup in the US, are customarily burdened with bad loans, have trouble borrowing in the open market and will only advance loans to the biggest and most financially secure customers in a severe risk avoidance maneuver. Expect the same results from this action as what happened in the US after TARP, TALF and a dozen other Fed programs designed to stimulate economic activity merely provides a cushion for the banks, bigger bonuses for their executives and no relief for the general population or small business, the engine of job creation.

Europe, like Japan over the past twenty years and the US for the last three, will suffer the same kind of economic stagnation. Of this, there is little doubt because the nations the loan to are nothing more than deadbeat borrowers, who fail to address the fundamental issues facing their governments, which is simply too much debt and not enough revenue, a condition that is likely to only worsen in months and years ahead.

The Central Bank intervention today will only provide some cover for a short time. Eventually, bad debts need to be written off, investors take losses and the financial system cleansed. It is one part of the business cycle the central banks continually deny and have not addressed, preferring instead to paper over losses with more debt, delaying and dampening any chance of real economic recovery. It is indeed unfortunate that these grand macro-economic thinkers have so embraced the Keynesian principles of borrowing, taxing and spending, they've forgotten that households constitute the backbone of all economies, not the banks, which they are so eager to keep from failing while millions - perhaps billions - of people are thrust from the middle class into abject poverty.

Along these same lines we have the president's proposed American Jobs Act, which is currently dead on arrival in the congress. House Republican leader John Boehner predictably took aim at the president's proposed $447 billion jobs package, labeling it as a "poor substitute" for polices Boehner and many House members prefer. Boehner referred to the president's policies as "short-term gimmicks" as opposed to fundamental changes in tax laws and reductions in regulations that are strangling American businesses.

As expected, Boehner and other Republican leaders have said that Obama's plan to pay for his jobs program with tax increases is a non-starter on the Hill, effectively killing Obama's plan before it even reaches the committee level. Once again, we will be witness to great wrangling for weeks or months over what's needed to kick-start the economy. While some of Obama's ideas are worthwhile, they are still likely to be ineffective in solving the nation's burgeoning employment crisis.

Additionally, in the early part of the day, both before the market opened and during trading hours, a stream of economic news and data - most of it bad - made its way to the Street. Included was another week of initial unemployment claims at 428,000, a jump of 11,000 from the previous week and the 21st week of the last 22 that initial claims have been over 400,000. CPI came in with a rise of 0.4% for August, a 4.8% inflation rate, annualized. Industrial Production inched up 0.2% and capacity utilization was nearly flat, with an increase of only 0.1%.

Two Fed districts reported sour economic data. The New York Fed released its monthly Empire Manufacturing Index, showing economic activity in New York state falling again, at -8.8 in September after a -7.7 reading in August. The Philadelphia Fed's Economic Index improved, but only form a horrifying -30.7 in August to a less-frightening - though still deteriorating - 17.5 in September.

With those sad numbers serving as a backdrop, Wall Street once again proved that it only pays heed to what it perceives as positive news, ramping up right out of the gate and posting large gains for the day on the promise of more free money for all banks, particularly those in Europe.

With all the momentum being built into the coming holiday season and the presidential election season due to heat up shortly after that, the chances of a catastrophic collapse are now more evident than ever. The bankers and politicians have contrived solutions that serve only them well and do little if any good to the common working man or woman. Institutions globally are under attack by angry citizens who have lost nearly all faith in the current regime of world leaders to actually make laws and progress that will heal the deep economic wounds that continue to be inflicted on once-great nations.

While the politicians focus on making speeches and posturing against each other in hopes of winning re-election, the rest of us are left wondering who will be around to cast the needed votes for these fools. Our economic malaise deepens daily and the fiat money system grows weaker with every new plan designed to keep banks and nations from facing reality. Denial is alive and well at the apex of our political and economic structure.

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