Thursday, June 27, 2013
EU bank bailout deal will fail
Re: EU bank bailout deal
This deal almost ensures that depositors of funds greater than 100,000 euros will lose everything when the inevitable bank failures start cascading across Europe. There are provisions for exceptions, so it is possible that the ECB will simply print more money. For politically powerful banks and nations, this provision may be invoked. Anyone who thinks that the same rules will apply EU-wide needs a crash lesson in real world politics. It's one thing to throw the Cypriots under the bus and another for the French.
Of course, this so-called deal never addresses the fundamental issue of why the banks got in trouble in the first place. Therefore, there is no reason to believe that there will not be similar crises in the future. No one wants to address the fundamental error of uniting fractional reserve banking with infinite reserves produced by central banks, which causes moral hazard and capital misallocations on a massive scale. The money is gone; it has been gone for a long, long time, but the ECB has been papering over the problem with new reserves created out of thin air. But now reality is reasserting itself. One thing is clear--the least politically powerful will suffer most of the losses.