Anorak | What’s Really Wrong In The Eurozone: The ECB-Triggered Depression Looms

What’s Really Wrong In The Eurozone: The ECB-Triggered Depression Looms

by | 15th, November 2011

HOW we got here is something that we can all argue over. Workshy Greeks, idiot politicians, bankers’ greed, whatever, knock yourself out with your favourite explanation. However, where we are is easier to explain.

We’re just before a Depression. Yup, one just as bad as the one 80 years ago. And yup, for exactly the same reason.

No, that’s not workshy Greeks, bankers’ greed but it is idiot politicians and central bankers. What turned the 1929 Crash into the 30s Depression was the way that the money supply was allowed to contract. It just didn’t have to happen at all.

What’s happening now over in the eurozone?

Greek banks are insolvent, it’s true, if you mark their sovereign debt exposure to market. But to a first approximation, no other banks are. Mark French banks’ holdings of Italian sovereign debt down by say 10%, and they’re still fine; their capital drops, of course, as it would with any write-down, but certainly to nowhere near zero.

What is true is that Europe is in the middle of a textbook liquidity crisis. Banks are not lending to each other — and the ECB isn’t stepping in to solve the problem. This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

For a financial system to work you’ve just got to have someone who both can and will print money when it’s needed. The eurozone was built so that the ECB was specifically banned from doing this. So now that we need it (now that we need quantitative easing, like the UK and US have had) now we can’t get it.

The problem lies with the idiot politicians who designed the system.

Posted: 15th, November 2011 | In: Money Comment (1) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink