At the current rate, it’ll cost $9trillion to keep the eurobanks afloat until March 31st 2012.

Why we are heading for Grave New World

Just over three weeks ago, I posted a piece about Central Bank interventions to help eurobanks borrow dollars cheaply. In it, I was trying to make the point that this was, yet again, an example of what I call Bernankerism: trying a failed strategy over and over on the ‘one last heave’ principle…which actually isn’t a principle at all, it’s the triumph of blind faith over experience. However, I now see that, at the time, I missed a much more important point lying not very hidden in the statistics.

The first major bank intervention in 2011 to let the EU’s banks borrow cheaply began on September 21st. The US Fed alone set aside $400bn for this purpose, and other banks contributed in the region of $70bn. In the event, some $600bn was borrowed. Somehow, in the following nine weeks, all the money borrowed by private banks either leaked away or was reinvested. The media headlines largely ignored this, focusing instead on the stock market boost that resulted.

Around 28/29th November, a second liquidity-operation by central banks was confirmed. This time the Fed used the term ‘unlimited quantities’ of dollars on offer for borrowing. And this time, it’s harder to get a clear steer on what was borrowed. But the Wall St Journal said at the time, ‘History shows that the effects of massive central-bank interventions can last for years’. In fact, it seems to have lasted three weeks.

You can tell this by the staggering take-up of the ECB’s programme of cheap  eurobank liquidity after 21st December – $643bn out of one central bank in just 36 hours…lent to 513 private banks. This was 50% higher than even the greatest pessimists expected; and this time, the world’s markets didn’t respond at all.

“It was and is a total waste of money,” one senior credit manager told The Slog yesterday. “This was the markets’ way of telling Mario [Draghi] ‘forget it pal, this isn’t working’. Course, what the markets don’t have is any idea what he should do now.”

A straw poll of five senior US and EU contacts suggested that probably, all up, somewhere close to $2trillion has been thrown at eurobank liquidity in almost exactly three months. One very hawkish Swiss-based executive told me the new liquidity river “will be dry again come January 10”.

Now this is serious. You can’t even extrapolate forward and say, “That means the annual running total to bail out eurozone banks is $8trillion”. Looking ahead without being hawkish at all, a private eurobank borrowing need at this accelerating rate would require another $9trillion by the end of Q1 2012.

I calculate that number not as a serious prediction, but to make a simple and obvious point: the world doesn’t have ten trillion bucks right now to throw at 500 European banks. And even if it did, spending that amount on the banking system with the economy dying on its feet wouldn’t even allow the Hank Paulsons of this world to say with any credibility, “There is no alternative”. If this is what it costs just to keep one part of the global financial system from eating itself, then the system is a crock in need of urgent replacement.

Either the banks are allowed to fail. Or the ECB starts printing money. Or the current ClubMed bondholders stop jerking around and face facts: unless something gives here, we’re all dead.

But there is an even bigger issue which, sooner or later, somebody with power and balls needs to address. As I keep banging on about here, Central banks contain our tax money. Massive quantities of our money that could solve the socio-economic problems arising from eurozone debt lunacy are being ploughed into banks that contain our invested money – all of which we stand to lose – while senior investment bank executives gaily continue to share $12bn dollar bonus pools. (Although I think we can, at last, safely observe that this will now come to an end…because even they have run out of defences against commitments.)

The bottom line is that in order to try and bolster the defences of 500 private banks – hardly any of which are financing capitalist entrepreneurs any more – taxpayers, investors, pension holders and Treasuries around the globe are being turned upside down, and shaken vigorously until empty.

‘Empty’ is almost with us. But where is all the money going? The key word above is ‘commitments’. I doubt if anyone can quantify with even a vague exactitude how much is going where. But lessons from the past offer some clues.

The great majority of the money is going to service debt repayments and/or the fact that the existence of these unrepayable commitments has alerted other banksters to their plight, cutting them adrift from further loans. It comes from the market deciding, as all neocons will tell you they must do, that there are prey out there in big trouble. This is a polite way of saying ‘distrust between sharks’.

These commitments are out of any sensible proportion to either the liquidity or capitalisation of such ‘victim’ banks, because everything has been leveraged miles beyond sanity – CDSs, gold, derivatives, mutual insurance of one form or another: all those things which have created an amount being lent and owed ten times bigger than global GDP. But we must also remember that the banks looking to get their money back from failing peers also stand to lose. That in turn makes them a bad credit risk. On and on the vicious cycle goes….except for the impregnable banks who pick up the pieces for a Dollar afterwards: we as taxpayers are 100% funding their acquisition programme.  Hold that thought.

Quite a lot of this new liquidity is designed to help stimulate the eurozone sovereign bond market. According to Deutsche Bank, about half of the 442bn euros that the ECB lent to banks in June 2009, in a similar liquidity scheme, was used to buy government debt, much of it Greek or Spanish. Since then, of course, No 5 economy Italy has been added to the sick list; so risk aversion has increased massively. I’d say around 25% of the latest ECB cash-shower has gone on this. Good news if bond sales go well at lower yields….but ultimately, the sovereign debts are also unrepayable. So this is simply more can-kicking. And of course, mega-big banks and funds can pick up sovereign bonds during post-trades at big discounts. They then change their name to ‘bondholder’ – and refuse ‘on principle’ to sue the ECB for not starving the Greeks quickly enough. Another thought to hold.

Some of the healthy banks will simply take the cheap liquidity scheme monies, and then invest them with other central banks. The ECB is offering such healthy private banks – literally – a free profit margin of 400%: they can take money at 1% and reinvest it at 5% plus. Fewer banks getting richer and richer with taxpayers’ money. A final thought to hold.

There is no point in going into the motives of each private banking concern’s management in this criminally insane system, because that’s just mind-reading to make polemic points. I am not an Occupy Leftie fuelled by paranoia and envy – just a radical realist who can see the appalling potential for socio-economic calamity.

The big financial movers are going to have all kinds of different motives, ranging from mindless greed via cynical megalomania all the way through to (among the Mutuals) genuine social concerns. But the ‘wealth-transfer’ process I first identified some months back is proceeding at a pace even I didn’t expect. This is the continuing rush of wealth away from the citizens and their elected representatives, towards the megabanks, hedge funds and associated financial investment firms: in almost every way, a reverse takeover by stealth….although with every month, it begins to look more blatant than latent.

Over the last few months of 2011, I have seen a surprising number of intelligent people shrug when this tectonic power-shift is discussed, often saying only, “Well, what do you expect? The politicians are clearly ego-centred and unwilling to take the pain – so the financial technicians must take up the reins.” To me, this is precisely the same as a frustrated German in 1931 saying, “Well, the Weimar crooks have screwed us all, so let’s give Hitler a try….at least he has a plan.”

Mr Papademos has a plan, and Signor Monti has a plan. Signor Draghi also has a plan. All three of these gentlemen were trained by one banking firm – Goldman Sachs – itself heavily implicated in a Greek Government plot to disguise Sovereign debt from Brussels. All three gentleman are also committed to zero debt forgiveness, and wax lyrical about “not compromising the currency” by bailing out any more ClubMed governments. All three will reduce any and all forms of social aid in order to achieve this – as will the newly elected Rajoy administration in Spain.

But none of this trio – and clearly also not the IMF, the US Fed, China, other Brics, or any Western political leader – seems to (a) be aware or (b) care or (c) have the will to desist from this suicidal policy – if I may flatter it with that description.

And some of the banking fraternity clearly are pernicious. When Bob Diamond casually says, “Fine – have the retail arm of Barclays” to UK government and regulators, what he means is, “I don’t need these poxy shops taking nickels and dimes from the peasants. We mighty bankers no longer need either citizens or politicians.” Lloyd Blankfein at Goldman Sachs is a similar case in point: he is about “God’s work”, and if that means billions must starve, well, WTF. Hank Paulson demands $870bn from Congress, which then disappears into Wall Street, never to be seen again, and not a penny of which went towards repairing the US economy or helping its victims.

This isn’t a socialist, placard-wielding tract. It is the plea of a committed capitalist and liberal democrat. As 2011 draws to a close, I am asking everyone who reads this piece, “Are you happy to have your taxes, savings, pensions, State services, liberties and voting power surgically removed to satisfy the crazy, anti-social and monopolist goals of a minute proportion of the world’s population? Are you happy to see Net Neutrality abandoned in favour of an internet heavily controlled by totalitarian governments and biased towards anti-libertarian media moguls? Do you think it’s OK for small, vibrant new businesses to be crushed under the uncaring heels of financial paper-peddlers who have lost any interest in being real capitalism’s power-house?”

If your answer to any of those is “No”, then you don’t have long to do much about it. The window is closing fast. And the man is on his way to fit the bars.

Related: The US has 40 times more debt than Gold in Fort Knox

Banks v People: Decision time for the West

Is any government big enough to face out the banks?