Bail Out Europe's Banks?
By Staff News & Analysis - March 04, 2011

The European Union is hoping that aid to Greece and Ireland combined with closer economic policy coordination will be enough to put an end to the euro crisis. But that's not likely, warns US economist Barry Eichengreen (left). First and foremost, he says in an interview with SPIEGEL, Europe needs to help out its ailing banks. – Der Spiegel

Dominant Social Theme: Banks are the world's most precious industry. Not a single one should fail.

Free-Market Analysis: The German magazine Der Spiegel has turned to an American economist to bang the drums for further bank reliquification (see article excerpt above). Obviously the US$50 trillion that Western powers have apparently dropped into the world's economy has not done the trick. We know this to be to true as well because of certain elite estimates floating around the blogosphere that the world (including the developing world) will need US$100 trillion or more over the next decade to ensure economic progress.

There is no way that the world is going to find US$100 trillion in its back pocket. The Anglo-American power elite can only be counting on one occurrence – the advent of a rationalized world currency (the bancor) along with an International Monetary Fund empowered to act as a central bank printing fiat money at will. We just commented on the advent of global money yesterday in our article Will Euro Failure Usher in World Currency?

In this article we want to analyze an interview that economist Barry Eichengreen gave to Der Spiegel. It is somewhat disturbing in the sense that it is ploddingly predictable. But in reading it and isolating its arguments, one can see how far the conversation has traveled on the blogosphere; the meretricious economic paradigm of the 20th century established with such tenacity by the power elite sounds increasingly naïve in the 21st century, given the crush of current events and the information available on the ‘Net to anyone who chooses to read it.

According to Wikipedia, Barry Eichengreen is an "American economist who holds the title of George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987." Eichengreen received his Ph.D. from Yale and was a senior policy advisor to the IMF in the late 1990s. He is best known for his book Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford University Press, 1992. In this work, he argues, "the proximate cause of the world depression was a structurally flawed and poorly managed international gold standard."

Eichengreen makes the point that in trying to tame the Roaring 20s stock market boom, the Fed turned contractionary in the late 1920s and this contraction was "transmitted worldwide by the gold standard. What was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international scramble for gold."

His main point seems to be (and we have not read the book) that the gold standard prevented the kind of expansionist monetary policy that Fed chairman Ben Bernanke has followed in the wake of the 2008 stock market crash. As a result, countries could only begin to reinflate if they abandoned the gold standard. "The main evidence Eichengreen adduces in support of this view is the fact that countries that abandoned the gold standard earlier saw their economies recover more quickly," Wikipedia tells us. We also learn that his latest book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, Oxford University Press, 2011.

Eichengreen is obviously a monetary "expert" – though we don't generally believe in experts. In the case of Eichengreen, we would make two points regarding his main monetary opus. The first point is that the world went off a silver standard in the 1800s in a breathtakingly coordinated series of renunciations. Eichengreen can argue all he wants about the mechanical reasons for the failure of the gold standard, but the same thing happened with silver previously. The entire Western world suddenly abjured silver. Anyone who looks at these events with an unbiased eye can detect the coordination. It had nothing to do with any sort of disastrous serendipity, as he argues regarding the gold standard. Of course, Eichengreen is an "expert" so it likely escapes him.

The second point we would make is that there is considerable evidence that the Fed went far beyond the legal limits of its Congressionally established gold-ratio in the 1920s. In other words, the Fed was only able to print so much currency against gold reserves but printed considerably more. Why it did so is a mystery, though one could speculate that the end result was what was intended: the erasure of the world's formal gold standard. In any event, come the crash of '29, people began lining up at banks to withdraw gold with their Federal Reserve notes. Roosevelt panicked and shut the banks. The powers-that-be were apparently worried that people would discover the Fed had printed notes far in excess of available gold. A crime had been committed; the cover-up was bank holidays.

We find none of this analysis in Eichengreen's work apparently, nor perhaps should we expect to. Mainstream Anglo-American economics is not about telling the truth. It is about establishing dominant social themes. The main meme that the powers-that-be want to establish is that the world's economic system can be run scientifically through the management of "wise men" – central bankers empowered to fix the quantity and value of money. Price fixing never works of course, but the top economists who are paid to make these arguments never point that out. For them, central banks are not a failed institution; they are merely works-in-progress.

A corollary to the meme of the infallible central bank (printing money-from-nothing) is the certainty that the banking system itself, the distribution arm of central banks if you will, is inevitably, a sacred necessity. Throughout the world from central to South America, from Europe to Africa and everywhere else, the downtowns of major metropolises are crammed with individuated banks. There are in some cases more banks than fast food places.

This banking bubble is perfectly predictable because banks ARE the biggest bubble in the world. Central banks will never let their distribution arm fail. It is this argument that Eichengreen is making in the Der Spiegel interview without saying so in so many words. It is not even a concept that is up for discussion. There is no head-scratching over HOW banks became undercapitalized. There is only the assumption – a nearly religious one – that banks need to be recapitalized, especially in Europe.

In fact, he begins the interview by making this point. "The present bailout attempts have never made sense," he admits. "Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. Now people are beginning to realize that there is no way around rescheduling Greece's debt — and that will also involve the banks. For this to happen, there is only one solution: Europe needs to strengthen its banks! … The euro crisis is first and foremost a banking crisis."

He goes on to make the point that "Europe's banks are in far greater danger than people realize" and then makes the candid statement that last year's stress tests were a "token gesture." How much recapitalization do European banks need? He puts the costs for the major banks, the big German and French ones at 3 percent or perhaps US$300 billion.

He then goes on to make the point that recapitalizing banks will do no good without a closer "coordination" among independent nation-states. He is thus arguing for an EU political and economic convergence, which he claims is a necessity given the current crisis. He also warns that the US will eventually come under the same scrutiny as Europe regarding its out-of-balance sovereign debt balances. "If [the US] hasn't tackled [its] debt problem by then – and it looks unlikely that we will – then we will face serious problems."

For Eichengreen however, the answer is not to cut spending. The tax stimulus is very ineffective, he says, because it tears another hole in the budget and rich people are not inclined to spend the money that they save with the cuts. It is fiscal policy – raising taxes and other sorts of revenue – that is necessary to shore up the finances of the US. "Either more taxes flow into government coffers or there will be less money available for universities, the socially disadvantaged, defense and so on. In California, we firmly believe that we lead the way for the rest of the country. It was true with surfing, and we hope it will be true with getting the country out of debt."

He also comes down on the side of "quantitative easing" in which central banks print money to buy their own country's debt. "Political deadlocks force central banks to get involved in monetary policy. The result is quantitative easing. Interest rates are already at zero, so the Fed is trying to stimulate the economy by buying securities. The same is happening in Europe. In serious crises like these, central banks suddenly become the only ones that can actually make anything happen … When it came to fighting the crisis, [central banks] made the right choices and worked hard."

He ends the interview by predicting that the dollar reserve system is failing and that some other currency will have to take its place. He discounts the yuan because "The Chinese will need 10 years to internationalize their currency to the point that it offers central banks and investors an attractive alternative to the dollar." He is more optimistic about the euro, which "could be ready in five years."

There is not one item in this interview that is in any sense original (though the bank recapitalization meme is surely alarmist). The only part of the interview that is somewhat surprising comes at the end when he speaks of the euro replacing the dollar. This is actually a strange statement to make given that at Davos the IMF came out with an astonishingly intricate roadmap on how to make SDRs (the currency baskets issued by the IMF) into the new global currency. Most of the report apparently centered on building a bond market, a repo market, etc. – all the paraphernalia of the modern central banking state – in order to ensure an orderly flow of funds.

There is seemingly no doubt, now, that the Anglo-American powers-that-be intend for SDRs to be the new world currency. The only question is whether the BRICs will go along with it and how quickly it can be built. It will take a significant crisis to create a world currency. (Out of chaos … order.) We see signs that the power elite is manufacturing just such a crisis worldwide.

Almost everything that Eichengreen states in his interview can be rebutted. He believes that banks need to be recapitalized with fiat money-from-nothing when it was the overprinting of money that caused the financial crisis to begin with. He believes it is better to raise taxes than to cut spending when faced with sovereign imbalances. He believes that when central banking over-printing of money has caused an economic crash, the remedy ought to be MORE money printing. His analysis of the Great Depression is naïve in our view and his explanation for why the world went off the gold standard does not take into consideration that countries went off the silver standard 50 years before in much the same way, one nation at a time – like clockwork, with an eerie kind of coordination.

Twenty years ago, Eichengreen's weary verities would have seemed to be common wisdom. Who, after all, would have had the resources or education to contradict him? But today, that is not the case. Austrian economics and free-market thinking have convulsed the blogosphere. The Federal Reserve and central banks in general have never been so unpopular, despite all that the establishment can do to try to stem such negative sentiments. Interviews such as this one with Der Spiegal do little to re-establish the elite's failing dominant social themes.

Yes, it is difficult in fact to see what can shore up the central banking system at this point. Gold and silver are money. Central banks fix the price of money and lead economies into the boom and bust of centralizing ruin. What is the solution? It is, in fact, necessary or even inevitable that the Anglosphere – which has implemented the central banking economy worldwide – will increasingly create a rolling economic crisis (with or without a war or wars). It is the only way in our view that continuity can be maintained between the current dollar reserve system and what is probably planned in the not-so-distant future.

The idea will be to put a basket of currencies in place via the IMF's SDRs that will include the dollar. In other words, patch together a bunch of failing fiat currencies. But after a point the dollar will not matter so much. The basket itself will assume predominance. Perhaps there is some other solution that we don't notice; and we are not prepared by any means to suggest that what the Anglosphere apparently has in mind will actually work.

After Thoughts

Of course there is another more rational scenario. We would hope that the chaos that Western powers-that-be are now inflicting on the world will result not in another elite-mandated system but a general breakdown of the abysmal fiat-money system. In such a situation it might well be that real honest money would reestablish itself – the historical norm of gold and silver; the kind of bimetallism that has served the world well for thousands of years. Such a system is the hope of the future. You will not find it mentioned in mainstream-media interviews such as the one that just took place with Eichengreen.

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