Quite glorious

OK, so Deutsche Bank isn’t insolvent. But our man has a plan just in case.

So we’re back to the same scenario as 2008. Does Deutsche fail and drag all the other major banks with it (as it very easily could because no one will have a clue how its derivative counter-party risk is really spread)? Or is it bailed out and banking survives, again, unaltered at cost to all the rest of us? Or is something else needed?

The only viable option is the third of these, of course. So how is the risk managed?

First, note the following list of the world’s Top 50 banks (which because of the way US GAAP works will under value US banks):

There are more assets here to save Deutsche than anywhere else. And if it is not saved the value of every one of these banks will fall, in total by more than Deutsche could lose. So the solution to any crisis is, and can only be in the banking system.

Second, these banks may be nationally located but to pretend that any is the concern of any one state is absurd: the banking system is now internationally integrated. In that case the the solution has to be international: to pretend that Deutsche is a German problem is just wrong.

Third, there is then a need for international cooperation. There are, I think ways to achieve this.

One is for international agencies (the IMF and World Bank) to step in to provide the necessary credit to keep Deutsche afloat to manage its commitments in an organised fashion.

Next is for this to be done in association with the Bank for International Settlements, which could manage the technicalities of such an arrangement.

And last is the need for international cooperation to recover the cost of such short term action from other banks through levies, charges and taxes that ensure that the collective cost of saving the system of which they are all a part falls on them alone and not the rest of society. I think the OECD could have a role here, potentially.

The stages are successive: in other words the day has to be saved first, then managed, and then costs have to be recovered. I do not believe it beyond the wit of people to achieve this goal. I may be an optimist, but I think most things plausible with political will. And I think the solution workable, albeit it will then demand real change from banks. The over-leverage in which they all indulge will have to end: there is no way round that.

I can stand accused of being simplistic. In the face of a crisis simple plans are often the best: everyone then knows what is required of them. We may be facing something bigger than a crisis. In that case ‘the simpler, the better’ may be an appropriate comment.

Deutsche Bank has a central banker. One that can provide unlimited liquidity. The Bundesbank, backed by the ECB. Given that unlimited liquidity is what is needed in the case of a bank failure this is a good idea. But our Boy’s plan?

The IMF and World Bank? Neither of which have unlimited liquidity nor actually the legal ability to intervene? Backed up by the OECD? The OECD? A research group, that’s what they actually are?

Seriously, the Boy is going to design an entire new international bank rescue system as the howling mobs surround the branches demanding their money back?

God’s Preserve Us.

” I may be an optimist, but I think most things plausible with political will.”

Isn’t that a delightfully Fascist statement.

It would be most amusing to see Dan Davies comment upon this idea. If we could stop him laughing for long enough to do so.

45 comments on “Quite glorious

  1. “And last is the need for international cooperation to recover the cost of such short term action from other banks through levies, charges and taxes that ensure that the collective cost of saving the system of which they are all a part falls on them alone and not the rest of society.”

    So, if a local newsagent goes bakrupt every newsagent within a 10-mile radius needs to chip and cover the debts so that they cover the collective cost of savinfg the system of which they are all a part. Or how about Ritchie gets to chip and cover the libel costs of George.Monbiot and every other lying twat in a system of which he is a part.

  2. He’s utterly off his chops. Asking the wrong people to do something stupid that they’re not equipped to do … it’s a trifecta of idiocracy.

    Also (and in common with many other commentators on this subject) he seems to be blissfully unaware that DB’s derivatives exposures with other banks are collateralised. Derivative counterparty risk isn’t the main issue here and isn’t a terminal threat to the rest of the banking system.

  3. Moron that he is that does not mean that DB could not drag the rest down. Confidence is all that backs the currency–pretty much all of them.

    Yes Kraut Central can print limitless vouchers but has NO reserve of stored wealth–gold, productive assets etc –with which to pay bills. I could write DB a cheque to tide them over for as many billions as they want. So could any of us in a system that pretends the fact that we have no resources to call on to cash such cheques doesn’t matter.

    And as for Ironman’s point: Banks are much more part of a system than newsagents. If your newsagent is in financial trouble you just check that he has a newspaper on the counter to sell you before you give him the money. Confidence in newsagents doesn’t matter much. If one newsie goes down that doesn’t imply much about the others. But when millions have their life savings in an organisation that is lending out more than it has in reserve–then confidence matters.

    The state should NOT rescue banks anyway–because they can’t without counterfeiting cash–so Murph is still full of socialist shite.

  4. Mr Ecks

    You have no clue about how banking or money works. There is no question about the German government’s ability to recapitalise DB if it were motivated and legally permitted to do so.

    This is entirely orthogonal to fiat currency; the German government doesn’t have the ability to print Euro.

  5. Has Murphy just invented collective insurance?

    Ground-breaking.

    One small issue with this. Under such a system, Miscreant Banks would keep 100% of dodgy earnings, but pay only a share of resulting fines, compensation and whatever else. So long as the former is greater than the latter, then it’s champagne o’clock.

  6. Oh hang on …..

    The champagne will be subject to the fines levied on other institutions. This could get awfully complicated.

  7. one key failing among the many other bits of idiocy and economic illiteracy in the The Sage Of Ely’s prescription is that he’s relying on every single actor, every politician, every bank exec, to act towards what he defines as the public good rather than in their own narrow self interest.

    What MP will vote for propping up a foreign bank if it means that a less-dangerous local bank will go tits up? What bank exec will choose to save someone else’s skin over their own?

    But of course, Ritchie doesn’t believe in Public Choice Economics, despite all the evidence for it in every day life.

  8. Helene is generally known by her diminutive Leni and she’s sounding remarkably spry for a more-than-centenarian.

    Has the Fat Controller made it up with Frances Coppola, does one know?

    A little technical knowledge might have kept him from bending beyond recognition the rules of the IMF, IBRD (if that’s what he means by World Bank) and the BIS so that they can do his bidding.

  9. OMFG, now William Joyce. Is he really entirely ignorant of schoolboy level general knowledge? Or is it that he will let through any comment that flatters him because he thinks his acolytes aren’t intelligent enough to see the obvious piss being taken?

  10. Eur–Sez you.

    How could Merks gang save DB then smart guy?

    By selling off govt assets?–An autobahn sale perhaps to get money that means something.

    They would print money. Now the Euro might mean they can’t–even assuming that since the Squareheads are Numero Uno in the EU exceptions could not be made–but that is what they would do.

    They might force a bail in or levy more taxes which could do it without running the funny money mill but what happens if all the banks start to look sick.

    Perhaps the banks could call in all their loans. That should solve it –right?

  11. LOL

    I wonder if his neighbours in the house next to the unimpressive end terrace in Ely get fed up hearing him playing “Tomorrow Belongs To Me” on his hi fi, probably using one of his (not boycotted as a tax avoiding company in the interests of his vital research) Apple products as a source.

  12. Of one thing we can be sure: Club Med Finance Ministers will be hugely enjoying all this (at least on the inside).

  13. I’m still unsure why these banks are “too big to fail.” The Government scheme we have here to cover up to a certain level of deposits seems to be a sensible cover against a bank failing and should mean that any failing bank should simply be allowed to go bust. Of course, the Government of the day would have to pick up the bill, but better to give people their money back than to try to give the failing bank people’s money back so they can lose it again. The assets will simply be sold off to the highest bidder to cover the creditors, as with any other failing business.

    Or am I missing something here?

  14. Mr Ecks

    They could recapitalise using an injection of state funds. As with all state funds, these would be raised through a combination of tax and borrowing. (Which are effectively the same thing, given that all government borrowing ultimately derives from the state’s ability to tax the future productivity of its citizens.)

    Since bund yields are currently negative out beyond 10 years, they would have no difficulty doing this absent political and legal ramifications.

    There’s no need to “print money.”

    However theoretically under new regulations they should be invoking a bail-in first. Since Merkel’s popularity is currently going downhill faster than a rabbit on a promise, she’s going to be reluctant to do this.

  15. Too big to fail refers to the manner in which if the very largest banks simply fail then we’ll be left with smoking rubble where we had a financial system – or a civilisation.

    The aim is to get all of them down to the size where we can do as you say. Let the shareholders lose everything and then auction off the assets and protect the depositors.

  16. So, under his plan we are all liable for banks going tits up anywhere in the world? Great. Does he also not realise that the more you spread the costs of risky behaviour, the less incentive there is to avoid it?

    Anyway, DB has approx £250bn in various assets, from what I have read. It can flog some to get out of this hole.

  17. Eur: “these would be raised through a combination of tax and borrowing.”

    So they have no funds with which to rescue anybody.

    Tax is straightforward theft–literally robbing Fritz to pay Hans –or even Hans to pay Hans if his savings are in DB.

    As for borrowing. That assumes you can find mugs to lend their money to a sinking ships bail-bucket fund. The first concern of a lender should be “how are they going to pay me back?”. Tax increases mean that lots of people will be hard pressed to pay the tax now let alone more tax in the future when loan payback time comes. In theory cos it never will. Many Western govts already owe more than they can ever payback (unless you are talking 99% taxes or geological timescales). Govts are only being lent funds because of the fantasy that they are more reliable than individuals.

    Yes they might save DB that way –but in a general crash –no chance. Funny money is their only recourse. And that will fuck everything up.

  18. Hilarious that libertarian Tim Worstall bans / curates. Are we sure that he and Murphy aren’t actually the same person?

  19. Re the Eur In Trouble Now/Mr Ecks dispute above:
    It helps if you think in terms of risk. And risk having a monetary value. Or rather, cost.
    No, the German government can’t & won’t print money. But the net result will be a transfer of risk from the bank to the German people. If you assign a price to the risk, in negative Euros, then each German becomes proportionally poorer by that amount. Exactly the same effect as printing Deutschmarks.

  20. BIS

    Thanks. It’s not as though the ability of the German government to raise very large sums of money to bail out banks has never been tested, they’ve done it in the recent past

    https://en.wikipedia.org/wiki/Hypo_Real_Estate

    The question is whether it is a good use of public funds (and legal under the new regulatory regime).

    However a pendant would quibble with your last line — injecting government money reallocates losses from the bank’s shareholders/creditors to the taxpayers as a whole, whereas printing money would be inflationary.

  21. @Eur In Trouble Now
    I’m not sure that follows. The “taxpayers as a whole” includes taxpayers with net debt & taxpayers with net money savings. The former group get the benefit of the risk transfer, proportional to how much debt they’re carrying… The latter suffer the cost, proportional again. Absent a general wealth tax, those with asset savings see their asset values rise.
    Now tell me how that differs from inflation?

  22. Debtors get no benefit, their debts don’t vanish. Savers avoid taking a haircut and taxpayers fill the gap. That’s zero sum. [In aggregate of course taxpayers will include both debtors and creditors.] Printing money increases the monetary base.

  23. DB’s current problems appear to arise from the fact that the US government will demand to be paid $14 billion, which comes straight off the bottom line and reduces DB’s capital to the point where they are insolvent to the extent of having inadequate capital to support their asset base.

    The US government will be happy to receive the $14 billion but quite frankly that is a fairly arbitrary figure and it doesn’t make much difference to them in principle whether they end up with $10, $14 or $20 billion.

    Ergo, much simpler solution that avoids involving the ECB, Fed, OECD, IRA, the People Popular Front for the liberation of Palestine and the rest is for DB to issue stock to the value of $14 billion to the US government.

    Current investors get diluted but there loss is equivalent to the loss on payment of $14 billion. US Govt gets a lot of tradeable paper. OK, not the same as hard cash, but honour should be satisfied, and DB 4remains capitalised, for a while at least.

  24. Diogenes

    Frankly, Tim Worstall could take a lesson or two from Murphy in effectively policing the comments on this blog.

    Too many wind up merchants appear here with suspect usernames, which does rather lower the tone.

  25. @Flatcap

    He’s published his version of events on the ‘Corbyn investment etc’ blog.

    Obviously, he’s trying again.

  26. Thats got to be be best comment thread ever on TR. Sue Dayton-Land is priceless. And still up there now……

    I can’t stop laughing at:

    Robert Ley says:
    September 30 2016 at 1:23 pm
    ‘So the solution to any crisis is, and can only be in the banking system.’

    This sounds like a final solution to the ailments which have afflicted the industry for the last 7 years.

    Larry McAfee says:
    September 30 2016 at 5:34 pm
    ” final solution” a little inflammatory in the current context.

    Richard Murphy says:
    September 30 2016 at 5:49 pm
    I think you are reading in something that is very obviously not there

    Even when the pisstaking is pointed out to him, the twat doesn’t see it!

  27. Diogenes / Jim / BiW

    Excellent thread. In addition to Sue and Robert, looks also like other knowledgeable German contributions, re their own recommendations for DB, in particular from Helene Riefenstahl, William Joyce, Wolf Mittler and Julius Streicher.

  28. Alex

    “Ergo, much simpler solution that avoids involving the ECB, Fed, OECD, IRA, the People Popular Front for the liberation of Palestine and the rest is for DB to issue stock to the value of $14 billion to the US government.”

    A simple and excellent solution!

  29. Edward – I know Helene thought “the people, the country, the government” was just too obvious and unlikely to get past his hyper critical moderation, but it seems he is either completely ignorant of history,or just so grateful for any post which agrees with him that he will let it through and hope his readers are too ignorant to see the piss being taken.

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