Money Times - August 9, 2016

Posted by Jill Kerby on August 09 2016 @ 09:00




The whole point of the banking system is for people not just to have a “safe” place to leave their money, but to have an affordable, reliable place from which to borrow money.

Once upon a time, about a million years ago, the money ordinary people and companies left on deposit was the source of much of the banks’ lending. Their profit was derived from earning more on the loan interest than they paid out to depositors.

But modern banking has evolved from a simple, profitable business to a very complex, complicated one in which not just the deposits , but the loans too, are leveraged many times over creating a huge waterfall of digital credit and money magicked up on computer keyboards with no basis in the old reality of hard work, productivity, earnings, profits, saving and investment.

All western economies rely entirely on this massive leveraging of artificially derived credit and debt. Phony money distorts prices; it leads businesses to borrow too much for the wrong reasons. It feeds asset bubbles as it artificially pushes up prices and the value of shares, bonds and property. It is also at the heart of the collapse of the western banking sector back in 2008 and why our banks are still amongst the most fragile in Europe.

Our banks, just like Italian, German, French and British banks, are still stuffed with bad loans and collateralized assets that are still worth less than when they were first purchased with magicked up money. 

The recent ECB stress tests showed that our banks will probably need another bailout if there is another serious financial crisis happens.  It won’t take much to tip western economies back into recession: growth remains sluggish pretty much everywhere; unemployment is still to high, people and corporations carry too much debt, their taxes are too high and incomes are too stagnant for people to demand the levels of credit needed to keep the ‘growth’ show on the road.

Fractional-reserve lending has been the scourge of modern banking for most of the past century but it began to spin out of control, along with Western government deficit spending (living beyond their means and accumulating large national debts) 45 years ago this month, when the last vestiges of the gold standard were abandoned by US President Richard Nixon. 

Deficit spending – economic methadone – is what keeps states, companies and individuals functioning. Could you survive without a cheap line of credit?

The latest stress test should come as a reminder to everyone, especially those readers who starting thinking (about two years ago) that the banks were “fixed” and that investing in them again might be a good idea, that they are not fixed. They remain damaged goods.

Brexit simply amplified what was apparent for many months:  the Irish and European banking sector remains weak due to legacy debt that was never cleared after the 2008 crash and that their earnings prospects are not good in moribund economic times.  Irish bank’s shares are worth half what they were this time last year, but even the great Deutsche Bank price is down 50%. The Italian banking sector is effectively bankrupt.

Under new EU banking rules however, bond holders, shareholders AND depositors (who already earn nothing) will all have to pay towards the cost of the next bailout. Honest bankruptcy was never countenanced in 2008 and probably won’t be the next time. There are no votes in the kind of (necessary) disruption that would create .

We can argue all day about the likelihood of another bank crash and its possible causes.  No one can know exactly when it will happen. But not even the great credit creators in the ECB can keep printing money from thin air forever, deny depositors any kind of a returns, or even inflict negative returns and get away with it forever…as the price of shares and bonds held by the super rich continue to soar.

Something will have to give. Or someone.

Until then, heed the time-worn warnings from 2008:  NEVER leave more than €100,000 in cash in ANY Irish credit institution or EU one.  Should there be a bail-in and you have more than that on deposit, you could end losing it.

The Irish Deposit Guarantee Scheme is in place, such as it is. But the fund from which compensation would be paid is, however, worth less than €400 million, a tiny fraction of the value of national deposits.

Meanwhile there is no pan-European deposit scheme to come to the rescue of any single country’s depositors should their DGS fund be unable to honour all its claims.

Remember Cyprus.



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