"We are in a very critical situation," said Chancellor Angela Merkel in her weekly radio address. "We are going to discuss with leaders of the financial institutions what can be done to head off a credit crunch." The move comes days after the Bundesbank revealed that German banks face a further €90bn (£82bn) of likely write-downs over the next year. … Proposals include a €10bn scheme to purchase toxic securities from banks. The idea is anathema in Germany and faces stiff opposition from Mrs. Merkel's Bavarian and liberal partners. The renewed sense of urgency follows a flurry of warnings from economists and business groups over the risks of a credit contraction. A survey by Munich's IFO institute revealed yesterday that lending conditions in Germany had tightened sharply in November. Some 53% of large manufacturing companies found credit hard to obtain, suggesting that the problem has spread beyond small firms without access to the bond markets. "The financing situation of firms remains critical and poses a risk to economic recovery," said the group's president, Hans-Werner Sinn. – UK Telegraph
Dominant Social Theme: Merkel to the rescue?
Free-Market Analysis: Germany under Merkel has proven a bit more resistant to endless bailouts than, say, America or Britain. We don't know if Merkel will end up with another bailout, but we do know her reluctance is admirable (as admirable as a politician can be), from our point of view, when contrasted with the meekness of other heads of state.
We have often wondered aloud (in print) in fact, if some of the leaders of the Western world actually have a clue about the huge economies that they head. In this case, Angela Merkel is concerned about the lack of money moving out from commercial and lending banks into the larger economy, but is resistant to throwing good money after bad. Purchasing €10bn of toxic German banks assets, may help out some banks, but we doubt it would do anything at all to increase bank lending, which is likely the main problem here.
We have pointed out already that since the biggest customer of most, if not all, larger Western banks is the central bank, there is little incentive for banks to lend to business during downturns. Banks are much more likely to get into serious trouble if they make bad loans than if they conserve capital, which is what they are doing. This does tend to lead to other problems, however, and Germany, like most Western economies is experiencing them. Here's more from the article excerpted above:
A survey by Munich's IFO institute revealed yesterday that lending conditions in Germany had tightened sharply in November. Some 53% of large manufacturing companies found credit hard to obtain, suggesting that the problem has spread beyond small firms without access to the bond markets. "The financing situation of firms remains critical and poses a risk to economic recovery," said the group's president, Hans-Werner Sinn. … German banks have been warning for months that new G20 rules on higher capital ratios are making matters worse, acting in a pro-cyclical fashion at a time when credit is already under pressure. The banking federation has called for a moratorium.
The mystery is why the European Central Bank has allowed private lending in the eurozone to shrink by 0.8% in the 12 months to October. The M3 has been contracting in absolute terms since April money, the first time this has happened in the region for over half a century. Gabriel Stein from Lombard Street Research said the ECB risks making a grave error. "It is remarkable for a monetarist central bank not to react when the money supply and credit are contracting. This is likely to exacerbate deflation pressures late next year," he said.
We are not surprised at the EU monetary contraction, dear reader. From our point of view, these crises are exacerbated by a power elite that has proposed (on purpose?) a Keynesian strategy to deal the unrolling economic ruin that takes place every few decades as a result of an overheated business cycle. The solutions this time, as before, are to throw more electronic money at banks in the hopes that they will lend.
Actually, since the power elite is full of very smart people, we are not sure "hopes" is the right word. In fact, the policies adopted by all the Western states (even Germany under Merkel) of printing and disseminating money to banks is in our opinion more akin to hoax than hope. What non-central bank banks are good at doing with the largesse they receive is either hoarding or investing in securities, especially the stock market. This allows the power elite and the mainstream media eventually to rebuild the capital of staggering firms and, as markets rise once more, to declare the "recession" is over.
Eventually, through the power of persuasion and the massaging of statistics, the elite usually does manage to re-inflate the bubble that passes for an economy these days. But not this time, we think, or not anytime soon. The damage has been too great and too many are out of work and do not, in our opinion, trust the system. The greatest fear that the elite has currently (if it can be said in aggregate to "fear") is that people will start to look outside of the established system to figure out what has gone wrong and how to make it right.
The last time there was an economic debacle of this size, or perhaps larger (the Great Depression) the elite genuinely feared a revolution, we have read. And certainly it took years to rebuild trust in the current version of Western fiat money. Indeed it took decades before people would invest in stock markets again – and really the only functional stock market (from a mass involvement point of view) remained the American market. But to build up confidence, the New York Stock Exchange was still doing road-shows in the 1950s, nearly a quarter century after the great crash.
Of course, at this point, from our point of view, the stock market itself is something of a dominant social theme, a promotion of the power elite itself to separate the middle class from its capital. We wonder at its ubiquity and question whether this casino-like approach to apportioning fiat capital would have penetrated Western culture even as far as it did without the stimulative effect of endless amounts of fiat money relentlessly dumped into the larger economy during the past 100 years.
Will Germany continue to bail out its foundering banks? We think Merkel will be dragged kicking and screaming to this solution once again, as she has been dragged before (or doth she protest too much?). Anyway, a German bailout if it comes will have little impact on moving banks to lend, as it has had little elsewhere, thus far. It will however, continually enhance bank-bottom lines which is perhaps the real point.
Brownian Bonus of the day: Of all the monetary memes floating around out there on the blogosphere (outside of Misesian free-market ones) the idea of state-run fiat scrip is perhaps the one arousing the most attention. The Daily Bell, unapologetically free-market oriented, will run irregular quotations and article excerpts designed to further educate our readers about "public credit" fiat scrip. We of course welcome feedback, especially from those who follow pro-state fiat financial historian Ellen Brown. Our first quote is from Ellen Brown herself, and appears in the introduction to her well-known book, Web of Debt, as follows: "The web of deceit that has engulfed us in debt [has] a simple solution that could make the country solvent once again. It is not a new solution but dates back to the Constitution: the power to create money needs to be returned to the government and the people it represents. The federal debt could be paid, income taxes could be eliminated, and social programs could be expanded; and this could all be done without imposing austerity measures on the people or sparking runaway inflation. Utopian as that may sound, it represents the thinking of some of America's brightest and best, historical and contemporary, including Abraham Lincoln, Thomas Jefferson and Benjamin Franklin."
A final point. There is no mystery insofar as we are concerned as to why the EU central banks have tolerated such a large contraction of the money supply. The middle class in this time of ruin, and even more than before, is to be squeezed until it shrieks. Being the Bell, we would like to think that out of all this carnage a free-market gold and silver standard might evolve spontaneously. It would be better than what we have got, wouldn't it?