Mercury Rising 鳯女

Politics, life, and other things that matter

The panic button is the one with the Vogon engraved into it

Posted by Charles II on December 9, 2011

Ok, we should be getting back into panic mode just in time for Christmas.

(Image from The Guardian)

Via Ritholtz, this article by Martin Hesse and Anne Seith, Der Spiegel:

Europe’s banks urgently need fresh capital to meet tougher EU rules, but they will have problems raising it amid the current crisis of confidence plaguing the euro zone. The survival of Commerzbank, Germany’s second-largest bank, is at stake, and Berlin is considering a full nationalization of the bank if necessary.

Bank managers say that the ballooning debts of a number of euro-zone countries are to blame for this renewed banking crisis only three years after the collapse of Lehman Brothers — and they contend that the crisis management pursued by Brussels, Berlin and Paris has merely exacerbated the problem

the world’s leading central banks provided some relief to lenders last week. They showered the increasingly dry financial system with cheap money. But the flood of cash has not removed the causes of the crisis. The banks will only stabilize when investors regain trust in their stability.

“It’s a mystery to me how some banks can be expected to meet the higher capital requirements at such short notice,” says bank expert Michael Göttgens from the auditing and consulting company Deloitte.

The traditional way would be to raise capital by issuing new shares on the stock exchange. Investors, though, are avoiding European bank stocks precisely because of the sovereign debt crisis. To make matters worse, financial institutions will probably also generate lower returns over the long term due to the more stringent regulatory demands.

banks can also increase their capital ratios by reducing their balance sheets — in other words, by granting fewer loans.

According to FT, stress tests say that German banks need $17.4B, French banks need more than $9B, Italian banks $20B, Spain aboit $34B, Portugal $9B, Austria $5B, Belgium $8B. The UK supposedly has capital sufficiency, but I wouldn’t bet on it. IMO, thanks to the arrogance of its financial wizards, the UK could be an epicenter for a meltdown in derivatives. Anyway, that’s over $100B that has to be moved into capital reserves, which can’t be good for economic growth, whether it’s by taking money from other uses into buying shares or by slashing lending.

Is there a reason to panic? Not the actual financial situation, which could be resolved through modest steps. But the leadership in both the US and Europe–and China and Japan–is so clueless that there’s plenty of reason to be afraid. Basically, as Krugman has pointed out, no one in power understands macroeconomics, even economists. All of the lessons learned during the Great Depression, all of which are obvious from macroeconomics and familiar to anyone who studied Samuelson, have been forgotten.

Added: Joseph Stiglitz read Samuelson.

3 Responses to “The panic button is the one with the Vogon engraved into it”

  1. MEC said

    Ack! Where’s my towel?!? I know I left it around here somewhere….

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