Austerity is the most oft-repeated word on the evening news.
It’s the vogue in Europe as Greece and Italy are taken over by economists. [After all, who better to call in to do the dirty work of imposing doom than practitioners of the dismal science.]
It’s not as if the technocrats must be in charge to develop a “plan”. In fact the problem has never been devising a plan to satisfy the Banks. The problem is to get people who have been suffering in near zero growth economies for years to accept further austerity, beyond that which has been self-imposed by the erosion of their personal wealth.
Certainly retirement ages can be raised, pensions can be re-jiggered, government spending can be cut, but that only deals with the Banker’s problem. Unless you happen to be a banker, that is not the “real” problem.
The real problem is that Greece and Italy [and Spain, Portugal, Ireland, maybe even France] financed their debt based upon growth rates more optimistic than they were able to achieve.
Fixing the growth rates would help the bankers, over time, and help the people as well.
But nobody is talking about fixing the growth rates. First, because it is difficult, and second, because the Bankers can’t wait.
The bankers can’t wait [or so they say] because they have not got enough capital to survive lengthy delays in repayment [what bankers call “workout”] of the imminent defaults.
The reason they don’t have enough capital can easily be the subject of a book, but it will suffice here to say that there are two ways to improve the performance of a financial institution seeking return on capital. Increase earnings;- reduce capital. Keeping extra capital around may be the prudent thing to do, but not if you are determined, at all costs, to have a greater return on capital than your competitors. The banks are not low on capital because they made a mistake. They are low on capital because they like it that way. It makes management look smart; at least until the chickens come home to roost.
As the chickens file into the roost the bankers are showing us how important it is to impose austerity by using economic terrorism. All they need do to raise the sovereign debt rates over the terror threshold of 7% is to offer some Italian bonds for sale from their portfolio and refrain from making any offers to buy at the going rates.
Consider it a shot across the bow, but however you look at it the Bankers can exercise control over the indicators of how bad, and immediate, the need is for austerity.
Think banks don’t coordinate bond trades?
Think again. In order to manage their investment profits from year to year banks have traditionally traded bonds at a loss in good years, and traded bonds at a gain in bad years. All without really losing or making an extra dime.
When rates fall, causing banks to earn less, they can sell bonds [which rise as rates fall] booking a gain on the sale. If rates rise causing banks to earn more, they can sell bonds, booking a loss on the sale.
But here is the clever part. On the very same day that J.P. Morgan sells bonds to HSBC to book a loss, it can buy back the same bonds from Citi at the new low price. By the end of the day’s trades J.P. Morgan’s portfolio hasn’t even changed, but it booked a loss to offset earnings and manage investment performance from year to year, to the delight of shareholders.
Meanwhile, back in Europe, the Bankers have succeeded in creating a sense of urgency to solve the banking problem, but have no interest in solving the slow growth problem which is really at the root of all the trouble.
The reason they do not intend to address the slow growth problem is simple.
While solving the banking problem means putting money in the hands of the bankers, solving the slow growth problem necessitates putting money in the hands of the people.
The exact opposite of austerity.
Is there a way to solve the immediate banking “crisis” and then get to work on stimulating the slow growth economies?
Yes. The Central Banks should raise the capital requirements of the european banks and be the investor of last resort for those which are unable to raise more capital. Then the Central Bank should take proportionate ownership, placing their economists on the Boards of Directors.
Suddenly, confronted by this new reality, many banks will find more capital and do everything in their power, to shore up their balance sheets. Including putting a halt to predatory bond trading.