The biggest news out today were the late day rumors of some sort of Euro lending facility similar to what the US government enacted in 2008 during the financial crisis. These programs helped shore up the banking system and provided the banks with loans needed to avoid mass insolvencies. It now looks like Europe is leaning in the same direction. Unfortunately, it looks to me like they’re making a mistake that is quite similar to the one that the USA made when they diagnosed the problem as a banking crisis.
A Euro TALF will help to ease the strains in the Eurozone banking system, but it will not come close to resolving the root cause of the Eurozone’s problems. This is just another instance of bankers ensuring that other bankers don’t have to take haircuts. Meanwhile, Rome will literally continue to burn. The turmoil in the banking system is a symptom of the sovereign problem. What Europe really needs is a resolution to the flaws of the single currency system. Some form of capital infusion to the sovereign is an example. This can be partially achieved via ineffective ECB bond buying, but will, in my opinion, ultimately require a bazooka via direct capital infusions to the nations themselves through some form of fiscal union, Eurobond or Euro TARP that fills budget gaps. The alternative is default, defection and (partial?) dissolution of the EMU. I don’t think we’re headed in that direction (although some sort of haircut can’t be ruled out for some periphery nations – I tend to think haircuts would be backed by some sort of bazooka effect so as to mitigate the negative impact). So, the logical progression is towards fiscal union of some sort and the resolution of the inherent flaw in the currency union. Tonight’s rumors don’t necessarily bode well for that and that leads me to believe the EMU leadership is either in denial of their problems or refuse to confront them. It’s easier to just shore up the banks and attach a few band-aids….
A TALF program will help ease banking problems and in that regard it is bullish for EMU banks and bankers. But in the long-run it does not help to resolve the root cause of the problem which exists at the highest level of the structure of the actual monetary system itself.
So, it’s shades of 2008 all over again (minus the massive capital infusions to the banks and the Recovery Act). Wall Street gets the bailout, Main Street gets the shaft….Periphery nations can cheer the continued solvency of the EMU’s banking system. Meanwhile, they get to wallow in the continued misery of the austerity that will continue to accompany this disaster. The moral code behind debt and humanity has officially become a joke as the wealthy bankers of the world continually spit in the faces of the rest of us….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.