Oligarch extraordinaire George Soros recently came out in the Financial Times with a dandy solution to solve the European debt crisis. The fix comes down to a gross marriage between Euro region governments and the capital-desperate financial sector. Not to say that they aren't already in bed together, but Soros's solution would be the shotgun wedding the world's financial system is waiting on. Let's go through how Soros determines Euro banks should be shored up on capital and saved (emphasis added in all quotations):
Let me stake out more precisely the narrow path that would allow Europe to pass through this minefield. The banking system needs to be guaranteed first and recapitalized later. National governments cannot afford to recapitalize the banks now. It would leave them with insufficient funds to deal with the sovereign debt problem. It will cost the governments much less to recapitalize the banks after the crisis has abated, and both government bonds and bank shares have returned to more normal levels.
Banks need capital, but indebted governments can't afford to bail them out again right now (not that bailing out the banks causes any unintended consequences or anything; it certainly doesn't incentivize risky behavior). It's too bad we can't close our eyes, click our heels together, and go back to the old days of drinking the sweet nectar of a fiat-financed bubble.
The governments can however, provide a guarantee that is credible because they have the power to tax. It will take a new legally-binding agreement for the eurozone to mobilize that power, and that will take time to negotiate and ratify. In the meantime, they can call upon the European Central Bank, which is already fully guaranteed by the member states on a pro-rata basis. To be clear, I am not talking about a change to the Lisbon Treaty but a new agreement. A treaty change would encounter too many hurdles.
Since the government has the legal authority to pillage its citizens of their earned wealth, if it makes a financial guarantee, the market will of course buy it because the money can always be forcibly taken from the citizenry if need be. These guarantees mean the banks are basically nationalized and prevented from going under. The prospect of civil unrest or capital flight due to increased taxes won't happen if we ignore it. If worse comes to worst, the ECB can always print euros. Screw the old Lisbon Treaty; we can write a new one.
In exchange for a guarantee, the major banks would have to agree to abide by the instructions of the ECB. This is a radical step but necessary under the circumstances. Acting at the behest of the member states, the central bank has sufficient powers of persuasion. It could close its discount window to, and the governments could seize, the banks that refuse to co-operate.
The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account. This would remove one of the main driving forces of the current market turmoil.
Since the banks are now being backed by their respective governments, they will have no choice but to bend to the whim of bureaucrats and politicians. It helps to imagine the likes of Angela Merkel and Jean Claude Troche brandishing chains and whips. If the banks refuse to cooperate, then resistance becomes futile as they will be completely nationalized. Before they were nationalized but under the guise of being privately run. With explicit nationalization however, this is when the fun begins.
The other driving force - the lack of financing for sovereign debt - could be dealt with by the ECB lowering its discount rate and encouraging countries in difficulties to issue treasury bills and prompting the banks to subscribe. The bills could be sold to the central bank at any time, so that it would count as cash. As long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them. In this way, governments could meet their financing needs within agreed limits at very low cost during this emergency period, yet article 123 of the Lisbon Treaty would not be violated. I owe this idea to Tomas so Padua Scope.
That pesky problem of sovereign debt could be dealt with by ECB money-printing. The debt can be inflated away with artificially low interest rates. Again, if the banks don't want to play, then they will be taken over. The Lisbon Treaty doesn't apply as long as we say it doesn't.
These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end. The recapitalization of the banks should wait until then. Only the holes created by restructuring the Greek debt would have to be filled immediately. In conformity with the German demands, the additional capital would come first from the market and then from the individual governments. Only in case of need would the EFSF be involved. This would preserve the firepower of the fund.
So let's sum it up: if the undercapitalized banks want to be shored up by corrupt politicians giving away taxpayer money, then they become wards of the state. If they take the deal and refuse to play along, then they really become wards of the state. That way the banks are recapitalized to fund the paying down of the debt of Euro governments in order to shore up the banks so the banks fund the paying down of the debt of Euro governments to shore up the banks...oh, and the ECB inflates to help the process (merry-go-round) along. This can all start after Greece goes into a controlled default, where bondholders are protected against massive losses, of course.
So there you have it: George Soros has delivered to us from the higher echelons of financial know-how a solution that only an oligarch could love. What a guy!
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