The European Bailout

October 13th, 2008 by admin | Filed under Daily News, Global Credit Crisis, Money Management, Recession.

“European leaders meeting in Paris have agreed a plan to tackle the banking crisis, saying no big institution will be allowed to fail”

Welcome to the European version of Peter Schiffs and Jim Rogers US nightmare scenario.

They have to let them fail…there is no other way to avoid a hyper inflationary nightmare…but if politicians stand by and do nothing, as they SHOULD do…they will be kicked out of office. There would be uproar. They are interested primarily in self preservation, even if it blows the economy to smithereens in the process.

Ask yourself honestly, if Gordon Brown sits by and do nothing and lets this process unfold…you would be screaming for his head…right? He KNOWS this……

Some quick thoughts on the European Bank Bailout.

Lets put European banks market cap at $1tr, and that’s being incredibly generous

Governments inject liquidity of 10% of this in preference shares or $100bn

They guarantee interbank lending…that really doesn’t help because….

The CDS market is worth $60tr…a big chunk of that is held in Europe and no one knows who is holding the bag.

The banks may lend to each other but they know that Lehman alone cost $400bn in CDS liabilities…so the loans will fly around and around in interbank lending…but for every loan dollar lent outside the banking system, it’s a dollar that they might need if more CDS liabilities spring up, which they will.

It doesn’t help ordinary lending…mortgages, corporate lending…this isn’t covered from what I’ve read. The pressure will remain on households and most firms. Property prices in Europe will continue their decline. Default and repossession rates will continue to rise. We haven’t even gotten to credit card lenders or insurance companies yet…never mind “KEY Local Employer LTD.”

The banks will hoard these interbank loans, if they are smart. Sure, they’re guaranteed against default WITH EACH OTHER, but are the government guaranteeing that they will stump up if Barclays for example has to find $300bn in CDS liabilities? No…not explicitly. The banks are operating now with one goal….to keep their businesses solvent. Their number one priority right now is self preservation…not some imagined altruistic mission for the greater good…they’re banks!

The governments could go as far as to guarantee the CDS liabilities…but even they can’t afford to do that. Ultimately, by stating that they won’t allow any banks to fail…this is EXACTLY what they are signing up for. This is exactly what they will have to do to STOP any bank from failing.

Politicians can say “we tried our best”. By being seen to be trying hard to help, this is their ONLY chance of re-election. It gives them a much better chance of re-election that sitting by and watching this play out naturally.

The only course of action they can take to save the economy is to do nothing…to just stand by and watch it all unfold…but that too gets them kicked out of office by a population that can’t believe that “big daddy” can’t kiss it and make it better this time like he has done before.

Taking away penalties for recklessness and failure (more accurately, moving them onto tax payers, people on fixed incomes and savers) is the problem…not the solution.

The bank rescue package is a few hundred billion into a possible $60tr CDS hole (it will never be a 100% claim rate…but you get the idea). …the fractional reserve nature of the banking system will multiply this new capital by 10, so it’s a few trillion into a potential $60tr hole.

This type of interference will continue until all the affected currencies are substantially inflated…and that my friend is the real problem that is waiting in the wings. That the real scary part.

I’ve got a real comfy chair and am just sitting back and watching the fireworks…it’s not every day you get to watch someone try to put out a house fire with gasoline.

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