Markets are speculating that Deutsche Bank is insolvent. I cannot say but if it is then the risk is phenomenal. We have yet to get over the failure of Lehman: Deutsche, if it failed could very easily be worse.
So we're back to the same scenario as 2008. Does Deutsche fail and drag all the other major banks with it (as it very easily could because no one will have a clue how its derivative counter-party risk is really spread)? Or is it bailed out and banking survives, again, unaltered at cost to all the rest of us? Or is something else needed?
The only viable option is the third of these, of course. So how is the risk managed?
First, note the following list of the world's Top 50 banks (which because of the way US GAAP works will under value US banks):
There are more assets here to save Deutsche than anywhere else. And if it is not saved the value of every one of these banks will fall, in total by more than Deutsche could lose. So the solution to any crisis is, and can only be in the banking system.
Second, these banks may be nationally located but to pretend that any is the concern of any one state is absurd: the banking system is now internationally integrated. In that case the the solution has to be international: to pretend that Deutsche is a German problem is just wrong.
Third, there is then a need for international cooperation. There are, I think ways to achieve this.
One is for international agencies (the IMF and World Bank) to step in to provide the necessary credit to keep Deutsche afloat to manage its commitments in an organised fashion.
Next is for this to be done in association with the Bank for International Settlements, which could manage the technicalities of such an arrangement.
And last is the need for international cooperation to recover the cost of such short term action from other banks through levies, charges and taxes that ensure that the collective cost of saving the system of which they are all a part falls on them alone and not the rest of society. I think the OECD could have a role here, potentially.
The stages are successive: in other words the day has to be saved first, then managed, and then costs have to be recovered. I do not believe it beyond the wit of people to achieve this goal. I may be an optimist, but I think most things plausible with political will. And I think the solution workable, albeit it will then demand real change from banks. The over-leverage in which they all indulge will have to end: there is no way round that.
I can stand accused of being simplistic. In the face of a crisis simple plans are often the best: everyone then knows what is required of them. We may be facing something bigger than a crisis. In that case 'the simpler, the better' may be an appropriate comment.
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Richard, I think this is a wonderful idea, we need a more powerful state control of these money lenders. It won’t be easy though, our will shall only triumph with the support of the people the country and the leadership. Not all can be relied upon.
International co-operation will only delay the process of beginning the required remedial action. Only a strong German state can act with the swiftness that is needed to bring these errant bankers to heal. The time for negotiation has passed I’m afraid.
I personally doubt that
I agree with Mr Joyce. Only the work of the Bundesbank can quickly free us from enslavement to the neoliberal hegemony that empowers our international banker elite.
No mention of: ECB or Bundesbank?.
Following the Bundesbank miserabilist line: no state aid to banks (if they are Greek or Irish) I predict a change of tune if the bank is based in Frankfurt – showing that the German finance sector does indeed purchase its hypocrisy wholesale. I suspect the Euros (ECB/Bundesbank – actually is there a difference?) will be unhappy involving outside players & are likely to prefer a Euro-fudge.
I think Mike’s comment (especially having regard to the two preceding it) hits every relevant nail squarely on the head.
Whereas I think Richard’s prescription is – sadly – pie in the sky.
Seriously wonder if the Euro could survive the ECB being the lender of last resort for German banks but no one else’s. Perhaps they could endeavour to make it a secret bail out…
‘So the solution to any crisis is, and can only be in the banking system.’
This sounds like a final solution to the ailments which have afflicted the industry for the last 7 years. Overcoming individual state interests is the challenge, however I fear recovery of costs will only be accomplished with the threat of force, and I’m not sure which of the agencies you’ve mentioned have that sort of leadership ?
I accept that risk
I think it would be joyful to see the strength of state exercised in this manner, finally a triumph of will over hope. Let’s stop the next crisis before it has a chance to spread to the ordinary people who have played no part in creating it.
” final solution” a little inflammatory in the current context.
I think you are reading in something that is very obviously not there
I am very impressed with your proposals Richard. What we need is a final solution for Deutsche bank which ensures accountability to the people and the defeat of the neoliberals. Your plan is the best I have seen.
I remember in the film ‘Inside Job’ where the DB economist was interviewed (a German sounding chap) and he said that banks over-leverage because ‘they know that they will be bailed’.
Has anything changed since 2008?
No
To be fair, I don’t think it is just the DB economists who had crossed the line. There seemed to be a general acceptance amongst the ‘Financial Elite’ that boundaries could be pushed beyond recognised, and acceptable, limits.
I used to think PPI and CDO were pills to get parties started. It looks like the partying is over for the stockholders now.
I was being fair. The DB economist (Willem Buiter) was the only one who actually came out and spoke the truth on the record so to speaks (banks will be bailed out because they are too big and this encourages them to take risks) and ‘they’ refers to more than one bank. Wouldn’t you agree? Watch the film yourself.
What?! So are you telling me that the subjugation of Greece and Portugal’s sovereignty, giving them an acronym like ‘PIIGS’, calling them lazy left-voting profligate debtors while siphoning 95% of all the bailout money loaned to them to German and French banks while asking the Greeks to be more austere and more competitive that resulted in the cutting of their pensions, lower wages, increased suicide and hunger rates and the rise of far-right Nazi parties, while running propaganda to fool the public to believe that the Greeks and Portugese are immoral, STILL HASN’T WORKED??!!