Here’s a corker for you all to think about: lenders buy bonds, but banks – many of whom are lenders – also sell them on. “Well of course they do,” I hear you cry, “We all knew that”. Fine, but there’s a conflict of interest there, is there not….as Goldman Sachs highlights in almost everything it does. Worse still, however, it pokes something of a hole in the business model when things turn as nasty as they are at the moment.
European banks have sold $413bn worth of bonds this year, equivalent to just two-thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature. Simple maths show that this leaves the banks with a $241bn funding gap in 2011, because nobody wants EU junk any more. So because the banks lent silly money to the issuers of the bonds, not only do they find themselves owed a lot of money….they also find there’s less coming in. Igle oggle ungle bingle umble dangle.
I think this goes some way to explaining why the markets are desperately putting pressure on Berlin to stop playing dominatrix games, and start showing them where the repayments are coming from. Debt repayment quite clearly isn’t going to come from economic growth: reduced banking income exacerbates a lending squeeze – which would drive the eurozone deeper into recession. So as The Slog reported yesterday, the Sprouts, Krauts and Frogs are coming round to the view that zero-haircuts for lenders are what’s required.
But you can see, I hope, how everything at the moment seems to turn back in on itself and, somehow, make everything even worse than it was before. Were I still in business and discovered such a syndrome in my systems, you know what? I think I’d almost certainly decide that there was a fundamental – unfixable even – flaw in the system. But don’t hold your breath waiting for anyone out there to reach the same conclusion.
We might at least expect warning signs on the radar to attract some serious systemic attention, but this doesn’t seem to be happening either. Interbank lending has dried up due to mistrust between the sharks. America’s money markets are no longer willing to lend to over-leveraged Euroland banks: $7 out of $10 previously extended from the US to French banks have disappeared over the last five months. The amount of money parked by frightened eurobankers is creating a cash mountain at the ECB. (No wonder Draghi doesn’t want to let the French anywhere near it)**.
I see very little difference between the zealots unable to grasp that the euro was a mistake, and the fundamentalists unable to see that Friedman was an idiot. But what’s most disturbing at the moment is capitalism’s inability to see that this globalist, bourse-driven, neo-con form of credit-fuelled capitalism is a crock. A crock which, I fear, gives permission to the loonies to pitch camp inside and outside every capitalist icon.
**Having re-read that observation, I think there would nevertheless be a delicious irony in Mario Draghi simply embezzling the bankers’ money and spraying it down on any genuine enterpreneur he could find.