WSJ – International Banking Is in Crisis
By Staff News & Analysis - June 27, 2011

We are confronting a crisis, all right, but it is not a Greek crisis, unless uncertainty as to the date of that country's de facto default counts as a crisis. If the insolvency of that tiny country were the world's only problem, it would be stretching the word "crisis" to apply it to the travails and insolvency of that tiny country. What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. – Wall Street Journal

Dominant Social Theme: The fall of the USSR was due to moral failure.

Free-Market Analysis: This is a fascinating article that the famous Irwin Stelzer has written for the Wall Street Journal. In it he makes a lot of points that we have made in the past, though we disagree with his conclusions. Strangely, they do not seem to be up to the incisive level of the rest of the article. We will discuss them, below, after we review the rest of the article itself (excerpt above). Who is Mr. Stelzer. Here's something from Wikipedia:

Irwin M. Stelzer (born 1932) is an American economist who is the U.S. economic and business columnist for the Sunday Times, the Courier-Mail, the Guardian and a contributing editor of the Weekly Standard. He is also an occasional contributor to the Daily Telegraph and the New Statesman. He resides in London and the United States. Stelzer has served as a managing director of the investment banking firm of Rothschild Inc and was co-founder and president of National Economic Research Associates, Inc which became NERA Economic Consulting and which was subsequently sold to Marsh & McLennan, Inc. He is a signatory of the Henry Jackson Society, a senior director and fellow of the Hudson Institute and has edited and introduced a book on neoconservatism. He is a visiting fellow of Nuffield College, Oxford. Prior to joining the Hudson Institute, Dr. Stelzer was resident scholar and director of regulatory policy studies at the American Enterprise Institute.

It is an impressive resume and the article is impressive, as well, in terms of how it gets straight to the point. "We are confronting a crisis," he writes, "but it is not a Greek crisis …" It is, he writes "an international banking crisis." This is what we've been suggesting regularly. The system of central banking has created perhaps the most monumental bubble ever seen.

There are literally thousands of major banks and bank branches all over the world. The downtowns of every major city in the developed world and the developing world are littered with them. People are so conditioned as to their ubiquity that they don't even notice it.

Imagine if banks were actually … tire manufacturers. Now imagine entering a strange city and seeing the entire downtown was FILLED with skyscrapers, each one representing a different, competing brand. Imagine the city and the countryside was full of branches, all selling tires. It wouldn't make any sense.

Nor does it make any sense to have so many banks. But they are protected by central banks; they are appurtenances of central banking. Much as a young girl will not ever discard a doll, so central bankers and the Anglosphere elites behind them will never discard a large bank. They may MERGE the bank, but they will never wish to lose it.

Stelzer, who is certainly an elite apologist among other things, will not write something like this of course. But the article is remarkable anyway for its blunt assessment that what is affecting the world today is a banking crisis. In a sense it runs counter to a more obvious elite dominant social theme that one can never have too many banks (big banks anyway) and that they are national and private sector ornaments. After all, they do "God's work."

We don't believe it. We have even suggested the current economic crisis is so bad it has irretrievably destroyed the US dollar reserve currency worldwide. Something else may take it place, but the 20th century economy created at Bretton Woods is probably no more. This is possibly – evidently – a bridge too far for Stelzer. Nonetheless, it is a frank article for the Wall Street Journal – the newspaper of record for mainstream business journalism in the US – to present to the public.

Start with Greek banks, he writes, which hold €70 billion ($99.3 billion) of their government's sovereign debt. If Greek banks were required to admit that markets are valuing Greek government debt at about half the value assigned to this paper, the results would be disastrous. It would constitute a kind of chain reaction. Shareholders would lose investments; banks beyond Greece would have to raise significant capital; depositors would make runs on banks, probably not just in Greece. Such a reaction might even bring down Germany's undercapitalized bank.

What Stelzer is saying, and we have mentioned this too, is that much of the Eurozone's bank-accounting mechanisms are fiction. This is especially true in Spain, as we have pointed out, where observers routinely explain that great country is not as badly off as Greece while glossing over the phony bank accounting of the country's real estate.

If Spain's banks were forced to mark their real-estate portfolios to realty, the banking predicament would become obvious. Spain's banks – the major ones – are apparently bankrupt. But as Stelzer does us the favor of pointing out, it is not just Spain. The banking crisis is spread throughout the Eurozone. To concentrate on Greece is to miss the bigger picture.

He provides us more facts as well. The rating agencies are now concerned about additional banks in Europe, three French banks and some 29 Italian banks. Mervyn King, Britain's central banker has called such bank problems the "most serious and immediate risk" to the U.K. financial sector.

And what of the US? "It is also obvious that we have no clear idea of the exposure of U.S. money-market funds to Greece's insolvency, or of insurers—remember AIG, anyone? That's why $51 billion has been pulled out of those funds in recent weeks by nervous investors, why America's banks have become reluctant to lend to their European counterparts, and why the Fed is asking U.S. banks about their exposure, including credit default swaps written on European banks."

Wow. Not only is Greece's crisis an international banking crisis, it is one in which the US is apparently a full participant. But for Stelzer it gets even worse. "The ageing of the European population, and the increasing proportion that consists of immigrants not enamored of Western values and free markets, present problems Europe has yet to confront. Nor has it coped with the stifling effect on innovation and growth of the systematic protection of inefficient private and public-sector institutions."

Here are his final points:

If we accept that the politicians have decreed that immediate default is off the table, we can, indeed, must:

• force the banks to recognize that much of what they count as assets aren't, and to recapitalize, even if this slows lending and growth in the short term;

• recognize the need to speak to markets with one voice;

• admit that perpetual dependence on the generosity of Germany is not a sustainable policy;

• remove incentive-numbing high taxes and barriers to innovation in order to generate the growth and tax revenues to support more sensibly constructed welfare states.

For Stelzer, implenting the above suggestions would be, he writes, "a start." But notice nowhere does he write that central banking itself is at fault, that the ability to create money from nothing is what has caused the inevitable, endless crises of capitalism.

Unti the Anglosphere power elites take a step back and acknowledge the fundamental systemic structures they have created are unsustainable, the Internet Reformation will likely continue to expose what's really going on. We would argue that Stelzer's blunt-talk is in part a reaction to the vast wave of articulated repugnance regarding central banking generally.

After Thoughts

As a meme, central banking is foundering. As an unquestioned element of modern society, it is losing credibility. As a real-world solution it is failing. Thus the larger systemic crisis, as Stelzer indicates, may get much worse.