If the Spanish banking system is now capital constrained with regard to buying more Spanish govt debt, liquidity adjustments by the ECB won’t matter.

In my opinion, global markets are not even close to discounting the systemic risk, as they are over discounting the capability of central bankers to deal with what might happen.

35 Responses

  1. Could this be a case of investors not making the distinction between the banking crisis (in the US) and the sovereign crisis (in Europe)?

    1. “The ECB may be inclined to wait as long as possible on further measures given its previous activism reduced pressure on governments to push through reforms, Wattret said.

      “If the crisis has shown us one thing, it’s that market pressure will move governments to act,” he said. “So the ECB has good reason to wait.” ”

      That pretty much explains it all. ECB is using increasing rates to blackmail governments into more austerity.

      1. @Gary,

        Don’t we expect the ECB board to tight-rope walk a fine line between the politics of all the nations appointing it’s members? Trying to walk the no-man’s land separating factions on a fluid battlefield is inevitably pointless. Don’t they need some long term campaign plan, and the independence, talent & training to execute it?

  2. State deposit insurance can’t afford to cover bank liabilities so they are likely to keep ignoring the under-capitalized zombies rather than forcing liquidation. The banks will continue to take risks in hopes of digging their way out while continuing to raise more capital. The central bank will keep lending as long as the banks have collateral. I think this limbo could go on for awhile yet.

    Fondo de Garantía de Depósitos

  3. What would happen to Spain and the rest of the world if they announced tomorrow (well, need a new government, but …) that they were leaving the Eurozone and reintroducing the peseta? What would be the least destructive way for them to do that … for themselves, and for the ROW (not necessarily the same).

      1. @WARREN MOSLER, Then the fastest growth should be in the gray market. Can you offer a plan for Gray Mkt or Systeme-Dminus Bonds? 🙂

        Let a neutral party like the Mafia sell & administer them.

      2. @WARREN MOSLER,

        Leaving the eurozone is going to be elite project, people will be very little asked. If government advisers could present this as a viable possibility, then maybe some courageous politician would make the move. After all, they do all sort of other crazy stuff like creating the euro inte first place…

        Unfortunately there seems to be very little awareness that reintroducing your own currency while not actually leaving the euro is even a possibility. Everyone talks in stark, absolute, blank and white terms: either you are in it, or make total conversion. Even Bill Mitchell argues in these black & white terms.

        We need to raise awareness. Warren, could you publish something on the topic? I can give you my skeletar proposal.

        In a case of Spain, let’s say Spain were to levy a new tax on corporations, payable only in pesetas. Then it could offer jobs, maybe in a job guaratee type of program that pay salaries in pesetas. Then people could choose if they would like to work in these jobs and earn pesetas, no coercision involved.

        Corporations, who have euros almost by definition cos’ otherwise they would not be in business, would want to buy pesetas to meet their tax oblications. So the workers would always be able to exchange pesetas for euros in the currency market, and that would guarantee that pesetas have some value.

        So, in the FX markets these two currencies could meet. Banks could be oblicated to attach easy-to-use FX trading system to every bank accout, so the conversation could be done on a click of a button. Central Bank could operate managed float exchange system than smoothens out most extreame fluctuations but does not peg the currency.

        So, the tax rate could vary by as much is needed to “drive” a currency. If they wanted to spend more, they could tax more. They would regain currency sovereignty, all while avoiding painful exit from the eurozone. What a relief that would we for the millions of unemployed!

        Of course central bank would have to operate duplicate system of reserve balances. It could pay interest on reserves permanently and there would be no need to issue bonds. Luckily, EZ countries still have their own national central banks. With couple of new computers and software these technical details could be solved.

      3. @PZ, That’s what I meant by the correction … EMF. Although Warren doesn’t seem to think this likely.

  4. Spain, Italy, and Greece are all incapable of long term financial stability as their cultures work against any type of long lasting civil organization, massive corruption always over takes these types of societies within a single generation.

    In Spain, the family is the single most important social unit. The family is above the individual, above civil society, and above the justice system.

    By this I mean that in Spain, a judge would never convict their own relative of a crime. The judge would always place their family (even a third cousin) about the law.

    Spanish people see this as a virtue but eventually this always limits these societies to “fun places to visit”.

    Contrast that to Germany, were the individual in a civil society is place well about the family unit.

    If your cousin is a rapist then any German would easily convict them, placing the society about their family.

    This is a key concept in understanding the evolution of nations and why certain nations such as Germany and America always have and always will achieve much more that a Spain or Greece.

    Japan also places high value on society, higher then the family but has an problem in that it places the value of a work group higher then that of the individual. So if you work for Mr. Toyota and your boss is a serial child rapist then you are not expected to turn them in.

      1. @SteveK9, Kinda nice you brought up culture though. MMT folks get frustrated about the bias against them, and that bias is all about cultural assumptions. For over three decades, minions of wealthy social Darwinists have incessantly beat the drum for unregulated markets and weaker governments. They have effectively used television to embed within our culture the operational assumption that any budget deficit is bad and federal debt caused by big government is the cause of our economic mess. Karl Rove’s tactic of repeating a lie until it becomes accepted truth has been used by the O’Reilly/Hannity crowd to convince Americans that a no-limit poker game between their flat purse and a billionaire’s vault is just OK. “Culture Warrior” O’Reilly is really an Economic Terrorist.

      2. @Chris Wroth, Yes, but there’s a grain truth in those observations. Germany & Japan remain among the most tribal nations on earth, with more homogeneous language, culture & history than “melting pot” nations that have been conquered by n-different linguistic groups in near history.

        Spain? -> Iberian tribes, then Celts, then Carthage-Phoenicians, then Romans, then Arabs, then Germans.

        Germany? -> unknown pre-German tribes[Sami? Basque?], then Germans – that’s it. Japan? -> Ainu, then Japanese.

        More tribal-like, common identity is good in many ways (easier to mobilize to common cause), but bad in others (easier to rush into poor choices). It all comes down to the array & kinetics of checks & balances. Those vary considerably between lingo-ethnic cultural groups.

        Alex overstates the statistical impact of a quite valid, verified observation. In this particular case of fiat currency, I’d actually jump to the opposite of his conclusion. It’s often easier to explore novel options when you have diverse audience members who don’t rush to conform.

  5. What happened to: “It’s now not over until the ECB writes the check, the whole check, and nothing but the check.”

      1. it would have to get bad enough to cause the ecb to buy all the member nation debt.

        and ‘bad enough’ is very ugly in my estimation.

        nor does the ecb seem inclined to do anything but demand more austerity when it buys

  6. I just ecountered a group of people who call themselves anarchist capitalists. They are more ignorant than the austrians. They beleive all the same things and that we have enslved them as well. Tedious.

    1. @rodney, They are not more ignorant than the austrians – they are the austrians. Radio talk host Lew Rockwell founded LVM Institute in 1982 and was Prez there until 2009. He is currently Chairman of the Board. He started out with Ron Paul and has made a career out of fear-mongering over the national debt. Anarcho-capitalism is just the latest version of the lies he has propagated for over 30 years. He is an Economic Terrorist.

  7. Warren just heard you may be in Italy Remini in May ..
    Can you confirm ..would love to go to hear you ..

      1. @Jacob Goense, Wasn’t there a Smother’s Brothers routine about that tax, many years ago? About falling into a vat at a chocolate factory?
        Here’s an updated version, in collaboration with Beardsley Ruml.

        “I yelled fire when I ran out of FIAT”

        [Why did you yell fire when you ran out of FIAT.]

        “Because no one would come if I yelled NO VALUE ADDED BY TAXES!!!”

  8. I was just privy to a chinese saying that he was sick of hearing about Greece and Spain ..In China he said ‘ if a problem can be fixed with money than it is not a problem’.

    MMT all the way >

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