One chart is all it takes
to prove a full-fledged European bank run on the banks is well underway
in the Club-Med countries and Ireland.
The above chart is from the Financial Times
article The anatomy of the eurozone
bank run
by Gavyn Davies.
A bank run is now
happening within the eurozone.
So far it has been relatively
slow and prolonged, but it
is a run
nonetheless. And last week,
it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.
The fear of bank runs is deeply
ingrained in all economists
who know anything about
the genesis of the Great Depression
in the United States in the early 1930s. Then, the failure of the Bank
of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped
out personal savings and greatly exacerbated the
collapse of demand in the economy.
The classic account of
the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic.
Classical Nonsense
We need to stop right there for a bit because the
"classic account"
Davies believes in is complete nonsense. The crisis then and now is a crisis of solvency.
The culprit is fractional reserve lending coupled with fraudulent lending practices that allow banks to secure deposits for 2 years or less but lend money out for 30 years.
The way to stop runs on
the bank is easy enough: stop fractional reserve lending and other fraudulent lending practices.
Davies continues with still
more nonsense.
After the crash, the establishment of the Federal Deposit Insurance Corporation was intended to ensure that deposit holders never again had to live in fear that their
savings would be in jeopardy. What are the lessons for the eurozone?
How FDIC Played a
Part in the US Real Estate Bust
Clearly there was fear depositors
would lose money and the run on Lehman and Bear Stearns is proof enough.
The irony is there was no fear for the longest time because of FDIC when fear should be
a rational worry. That lack
of fear led to depositors chasing the highest yields simply because they were government
guaranteed.
For example, Corus bank (among numerous
others) offered
attractive rates and invested deposits
in condo construction schemes in Florida, California, and Las Vegas. Were
it not for FDIC, no one in their
right mind would have put
deposits at Corus and other such banks that
went bust in the real estate crash.
The fools who did place deposits at such banks
seeking higher yields deserved to lose those deposits.
End Fractional Reserve Lending
Under a full-reserve 100% gold-backed
banking system, inflation would
be nonexistent and bank failures would be few and scattered. Instead, we have seen boom-bust cycles of increasing
magnitude with faith placed on FDIC, and that faith contributed to the magnitude
of the bust and an enormous
failure of hundreds of banks in a short period of
time.
In short FDIC should be phased out along with the end of fractional reserve lending.
The rest of Davies' article is
a hodge-podge of still
more fallacies concluding
with ...
Mario Monti apparently
took a plan to the G8 summit
to offer jointly-funded guarantees on bank deposits to apply across the entire eurozone. This would certainly help, but whether it would be
sufficient to eliminate fears of exchange rate losses
if the euro were to disintegrate
is another matter. To fix that problem, belief in the integrity of the
euro as a single currency needs
to be restored. The bank run could
bring matters to a head.
Belief in
the Euro? Why?
Pray tell why should there be a belief
in the Euro, especially when
the "solution" proposed by Keynsian and Monetarist clowns is simply to print more money to cover fraudulent lending practices by
banks, every time banks get into
trouble?
Belief in Gold
Note that the US dollar index is
right where it was over seven years ago.
The US$ index is at a
spot first touched in late
2004. Gold was well under $500 an ounce at that time, so please do not tell me gold is a function of the US dollar.
One of the reasons gold is
at $1600 with the US
dollar index above 81 is precisely because central banks in general (notably the Fed, the ECB, the Bank of England,
and China) have printed nonstop and the Fed and the
ECB have initiated all sorts of liquidity
and QE measures. In addition, the ECB's balance sheet is more bloated than the balance sheet of the
Fed thanks to the LTRO program.
Integrity of Gold
The proper conclusion is that gold is a function of mistrust in fiat currencies in general, not just the US dollar. However, nothing moves in a straight line including
faith (or lack thereof) in central banks' ability to handle this crisis.
By now it should be perfectly
obvious the LTRO is a complete failure. Banks in
Spain took the money and bought
more of their own bonds
and are now underwater on
them.
Only monetarist fools want the ECB to do more
of the same. Sadly, monetarist fools are nearly everywhere, and the chart of the price of gold says just that.
In conclusion, if the ECB was to take the action suggested by
Davies (and they might), it certainly will do nothing for the "integrity of the euro", but it
is highly likely to further the integrity of gold.
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