The European collective response

What’s wrong with deposit guarantees?

I’d suggest no limit, and later lower the limit, with deposits retaining the limit they were deposited under.

The no-limit gets big deposits (you want deposits, right?); the declining limit prevents a dysfunctional business model from working very long, ie the moral hazard.

Here is more detail on Germany, note the second paragraph:

Der Staat schreibt vor, dass 90 Prozent der Beträge auf Tagesgeld-, Festgeld- oder Girokonten nicht antastbar sind. Allerdings gilt diese Regel nur bis zu einem Betrag von 20 000 Euro pro Kunde. Darüber hinaus haben sich die meisten privaten Banken verpflichtet, pro Kunde einen Betrag von 30 Prozent des haftenden Eigenkapitals zu garantieren. Das sind bei den großen Instituten mehrere Hundert Millionen Euro. Im Ernstfall springt dieser sogenannte Einlagensicherungsfonds ein, in den private Banken regelmäßig einzahlen.

Bei Sparkassen greift ein schärferer Mechanismus: Grundsätzlich sind 100 Prozent aller Kundeneinlagen gesichert. Die einzelnen Institute sind verpflichtet, sich gegenseitig zu stützen und so eine Insolvenz von vornherein abzuwenden. Nach Informationen des deutschen Sparkassen- und Giroverbandes hat seit Gründung des Verbands in den 70er-Jahren noch kein Kunde seine Einlagen bei einer Sparkasse verloren. Ein ähnlich enges Sicherheitsnetz haben auch die Volks- und Raiffeisenbanken: Die Einlagen sind zu 100 Prozent gesichert, die Institute stützen sich gegenseitig, um einer Pleite vorzubeugen.

The first country which is going to follow suit is – not unsurprisingly – Austria …

This afternoon, the Austrian minister for finance W. Molterer declared that he will propose to
increase the guaranteed limit of private savings deposits due to fears
of an outflow of private savings from Austrian to German banks.

Until now the guaranteed limit in Austria is EUR 20.000 (as in Germany).
The proposal will be made on wednesday next week.

BTW, per this specific entry: I am posting now from Athens, Greece, where the crisis has not only not reached here, but is not even a topic of conversation! LOL.

I have a theory about the bailout crisis: it’s routine–a routine credit contraction caused by overexpansion. I would welcome a comment from the readers of this blog.

Here’s how to prove this yourself: Google “The Curve in the Road by John Mauldin”. Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out: LIBOR also spiked in Dec 07 and from Mar-May 08–to 2% from 0.5%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn’t seem unprecedented. I’ve heard that in the early 1970s a similar spike occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to 1300). From 2006 to 2008 (today’s crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.

Can we therefore say that this credit crisis is a ‘routine’ (albeit severe) response to the credit expansion we’ve had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.

One final note: you can argue that “but for” the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.

PS–A professional economist has independently made a similar argument to the above: Google “What Crisis” by professor John Seater.

I know this is a European comment section, but does anybody have any data on how Australia is doing? I hardly ever see any news about them since they are usually grouped in discussion boards with China and Asian countries, but they hardly ever come up. Does anybody know how their currency is fairing and how they are dealing with the European and American crisis?

welcome to oliver stone’s next movie….

Jim L: ever hear about Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963.

“Ya, it seems that guys like andrew jackson and the boys all had hits out on them after pissing off teh backers of the Central Bank. RON PAUL COULD get himself killed. Why? Because Ron Paul wants to abolish the privately-owned Federal Reserve Bank. Five US Presidents who sought to abolish the private-owned Federal Reserve Bank were assassinated:

1) Andrew Jackson (Survived); 2) Abraham Lincoln; 3) James Garfield; 4) William McKinley; 5) John Kennedy.

research each of them. “

Eric H, we sold europeans tons and tons of worthless paper that looked like it wasn’t risky.

Now they have to deal with that. We have offered to buy a little bit of it back.

it is good result