Brussels Alters Capital Requirements to “Spur Lending”

Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn’t enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact.

The political and bureaucratic classes will certainly never go back to sound money or free banking. The State’s paws will remain firmly embedded in the business of money, as the modern-day welfare/warfare states and the ever-growing hordes of cronies and zombies they have to keep well-fed have become utterly dependent on fiat money inflation. This will continue until the bitter end. New measures are now being designed to hasten its arrival.

 

3 EURO FRONT

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Before we continue, ask yourself if the euro zone actually needs more monetary inflation – even from the perspective of those who erroneously believe inflation to be an economic panacea:

 

Euro area Money SupplyThe euro area’s money supply over time. We are on purpose using the narrow aggregate M1, which is the closest approximation to money TMS. The broader aggregates include items that are actually not money, but credit transactions. This leads to double-counting. Money= the means of final payment for goods and services in the economy, chart via ECB – click to enlarge.

 

It is fair to say that this expansion of the money supply hasn’t made society at large any more prosperous; quite the contrary in fact. It has however been beneficial to the State and others with first dibs on newly created money, as real wealth has been redistributed to these privileged groups.

One of the good things to emerge from the 2008 crisis was an almost complete halt to the issuance of additional fiduciary media by European banks over subsequent years. In other words, they temporarily stopped their inflationary lending, thus creating an opportunity for the liquidation of malinvested capital, which was deprived of oxygen as a result.

In several euro zone countries this has indeed happened, but the associated economic downturn has been needlessly aggravated by the ruling class doing whatever it took to keep the size of the State and its bureaucracies at the previous level even while the private sector imploded. Our guess at this point is that nothing short of a complete collapse will be able to change this. As long as there are still sheep that can be sheared (this is how the ruling class sees wealth creators, by and large), the Potemkin village will remain standing.

Anyway, further wealth redistribution steps have already been taken by the ECB, which is currently busy with a “quantitative easing” program (colloquially known as money printing). The parabolic chart of the money supply above is becoming even more parabolic, as the current annualized rate of expansion is close to 14%. Moreover, the central planners have already let it be known that they are thinking about enlarging these QE operations even further. Apparently, 60 billion euro per month is just not enough.

 

Support for new Crony Projects

Alas, Europe’s private banks and insurers have been hampered by new capital regulations designed to make them “safer”. This is the alternative to a sound, market-based monetary system: one that is drowning in ever more numerous and complex rules and regulations. In this particular case, financial repression measures have been combined with regulations forcing banks to hold more capital, by declaring government debt to be “risk free” and thus not requiring any back-up capital. This is an example illustrating the chutzpa of the EU’s political class, given that a few short years ago, the sovereign debt of several European governments was the focal point of a crisis – when in a brief moment of lucidity, market participants realized this debt cannot and won’t ever be paid back.

Banks have however so far felt forced to continue holding back with respect to credit extension to the private sector; otherwise they would soon run afoul the new capital adequacy rules. Now Brussels is looking to alter regulations again, this time for the express purpose of fixing this perceived deficiency – via asset backed securities.

 

“The European Union set out its plan for overhauling the securitized debt market, laying down criteria for a class of notes that will merit lower capital charges on holders as part of a broader effort to expand financing sources for companies and spark growth.

The regulations, which amend existing laws governing banks and insurers, cover all aspects of asset-backed debt, from origination to capital charges, supervision and risk retention. The centerpiece is a new class of “simple, transparent and standardized” products eligible for preferential regulatory treatment.

The European ABS market has shrunk almost 50 percent since 2010 amid stiffer capital requirements for holders and investors’ reluctance to buy the securities blamed for the financial crisis. While sales have rallied to 67 billion euros ($75 billion) so far this year from 58 billion euros in the year-earlier period, they remain far short of the 308 billion euros raised by this point in 2006, the busiest year for issuance, according to data compiled by JPMorganChase & Co.

“If the securitization market would return to pre-crisis average issuance levels and new issuance would be used by credit institutions to provide new credit, these would be able to provide an additional amount of credit to the private sector ranging between 100 billion euros and 150 billion euros,” the European Commission said in the proposal. “This would represent a 1.6 percent increase in credit to EU firms and households.”

 

(emphasis added)

The problem (which remains unmentioned by mainstream articles on this topic) is of course that modern banks are not merely intermediaries between savers and borrowers. Instead, they create more money from thin air when making loans. The amount of real resources and capital in the economy cannot be changed by creating new money though. The introduction of new money merely alters their distribution and the plans of those who employ these resources in business. As a rule, a great many misguided plans end up being adopted.

A few additional details were reported in the European press. One that struck us as especially noteworthy was that there will also be an attempt to “ease investment in infrastructure”. This is specifically aimed at insurance companies, which will be allowed to take greater risks when investing in one of the countless white elephants the bureaucrats in Brussels are regularly dreaming up in this context.

We have previously discussed how wasteful infrastructure projects subsidized and financed by the State in Europe are (see: “The EU’s Stalinesque 4-year Plan” or “The EU’s Ghost Airports” for some color on the topic). In brief, these infrastructure investments as a rule waste capital on a truly gargantuan scale. It cannot be otherwise, as bureaucracies are unable to engage in proper economic calculation. Any benefits that may flow from these projects are strictly incidental and are so tiny, they cannot possibly justify the associated waste.

Given that real capital is scarce, these projects invariably mean that a great many more urgent consumer wants will have to remain unsatisfied. So why is this done? Well, someone is naturally always benefiting. Assorted cronies – in this case mainly from the merchant class in the form of big business – are lobbying for getting a share, and they do indeed benefit (check e.g. in the article on “ghost airports” linked above how the contractors and airlines connected to these boondoggles are profiting regardless of the fact that these white elephants will never make a dime and are likely to simply fall into ruin as time passes).

An especially egregious case is the famous Calabria A3 expressway, which is built with EU funds. Construction activities have begun almost 50 years ago. The road is still not entirely finished. However, the project has been an unmitigated boon for the Calabrian mafia ’Ndrangheta. This was presumably not the plan – these are cronies too unsavory even for Brussels. In 2012 Italy was eventually forced to return a few hundred million euro in funding to the EU when the scandal over the countless kickback schemes characterizing this mafia-riddled project broke. The latest rumor is that this monumental boondoggle of a road will finally be finished after five decades of wasting money.

 

v2pg-24-Italy-A3-Glabb-ccPart of the “eternally unfinished” A3 expressway in Calabria. People often ask “who will build the roads if there is no State” – this boondoggle is a strong reminder that road building would be better left to anyone but the State.

Photo credit: Glabb

 

Conclusion

There is of course nothing inherently bad about ABS. We are not arguing in favor of creating any arbitrary regulatory obstacles to this asset class. The problem is rather that the intent seems to be to spur more inflationary credit creation and at the same time employ credit dirigisme so as the channel the funds into the types of projects the bureaucrats like.

The end result will be a structure of production that will continue to be out of line with actual consumer wishes, coupled with a further increase in risk to the financial system.

 

 

 

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23 Responses to “EU Moloch in a Fresh Bid to Inflate”

  • therooster:

    Crysangle ….

    I’ve been studying this evolution for a very long time. I think you may find some key answers around the practical and actual business developments in the name of protecting one’s self in the process of of system development and roll-out.

    I have had many arguments in this context. People will often jump to the best answer but that is often based on idealism , rather than practical sense in view of the fact that we tend to have self interest at the heart of what we do for a living. A win-win is even better, of course.

    Banks do not have any propitiatory rights on the measurements of mass or weight. They do have proprietary rights in the use of their own fiat currencies/pricing tools, which in the case of monetary gold is important since these measurements warrant instant consideration off the top …. debt-free , still, of course. ;-)

    Banks will actually make more revenue off digital gold transactions (from the light side) than they have on interest on the dark side. There is a profound and deeply seeded presupposition in regards to the relationship between the creators of assets and the creators of debt. The common view is that the relationship is polarized. Ultimately, it is not. It is symbiotic.

  • therooster:

    Crysangle … As you can see, old habits die hard and there are many (most, actually) who still see the “dark side”
    (debt) as having a monopoly on liquidity. When breaking from the isolated position of the dark side, in order to gain perspective of the complete yin-yang, asset based liquidity becomes far easier to recognize. It’s just a matter of “stepping into the light”.

    Capitalism is incomplete, much more so than it may be flawed.

  • therooster:

    Cryangle … that’s a fair assessment, IMO. The major justification for fiat “currency” regardless of what you may want to call it is that it has served a very useful market oriented apprenticeship in the development of a real-time measuring tool (for pricing relativity) so that bullion based settlement can satisfy a trade for something that has a fiat price measure associated with it , that measure at this time being a measure of fiat currency which acts as a measure of value….. which has RELATIVE significance.

    We can compare measures (prices) on two debt-free items and decide if we want to trade one for the other, directly. The measures do not have to act as currency in this context. One of those items for trade can be bullion which can act as a standard for trade settlement. Call it what you like. The point is we have found a way to trade an ounce of gold for a man’s new suit , debt-free, by using price comparisons between the two debt-free widgets.

    Question : Could the role of fiat pricing, in order to arrive at debt-free trading, have come about without the fiat process forcing the fiat numbers to act as a “currency for settlement” . I can’t see it … not at all. The “currency role” was an absolute must (by fiat) if the numbers were to emerge as a useful pricing measure of relativity in the process toward debt-free trading. The numbers had to gain market traction.

    Now the rules can change, as can the language. Wouldn’t be the first time.

    In the Bitgold model, I call the gold “settlment” while the gold backed digital currency is currency, that currency being a direct representation of the stored gold at Brinks, based on the currency’s unit of account being mass (grams). As long as digital grams of mass line up with grams of bullion in the vaults, 1-to-1, the system allows for instant and seamless global liquidity and debt-free transactions. Fiat numbers are used as price measures for the sake of calculating an appropriate mass of gold for settlement.

    The real-time gold prices allow for fully expandable liquidity on a fixed weight. Monetary liquidity for bullion is the product of (wt. x trade value/ unit wt.) which comes back to (wt. x USD/oz) in our application. It should be easy for all to see that liquidity is not solely tied to weight, only, (mass) but to weight and/or the weight’s trade value. Reviewing Bretton Woods and the events that led up to the price peg severance likely deserves a critical review. The events support all of the above

    • Crysangle:

      Well, I won’t be convinced that fiat is or was necessary, but to practical purpose there is no denying that it is part of our evolution.
      The only scalability available now compared to say a century or more ago I would place as the ability to privately micromanage weight under full audit and allow secure representation at point of transaction.
      I am not sure that the relative homogeneity and security of the current fiat system is due to the hyperstructure that accompanies it, that that structure could not have existed using gold, or that it would have been a more noble evolution maintaining only gold as currency.
      We won’t know, as what has been has been, and what is, is.

  • therooster:

    …. but meanwhile , I’m exchanging gold for goods and services, as are many others. Things change. They morph. A static belief, system is ruled by a static god. A static god is a dead god.

    • VB:

      No, you aren’t. Your income is in your local fiat (Canadian dollars in your case) just like everybody else’s. Whatever you are buying is sold for fiat, just like everything else. Fiat is your medium of exchange.

      Just because your scam outfit claims to store your money as gold does not make gold a medium of exchange. You still buy it with fiat and you spend fiat.

      Even in the unlikely case that your vendor happens to be a user of the same scam outfit and the outfit claims to “transfer gold” from you to him, this isn’t really what is happening. The moment he wants to spend some of the revenue he got from you on something, he will have to convert his holdings into fiat, because fiat is what everybody accepts – it is the medium of exchange, you know. The currency.

      What the “bank” keeps your holdings in and how they are transferred from one of the “bank’s” customers to another is irrelevant. My bank happens to keep my fiat holdings as electrons. This doesn’t make electrons a medium of exchange. The medium of exchange is still my local fiat – because this is what I am paid in and this is what I pay with and what the people I buy from eventually get.

  • therooster:

    There is actually no need for spending cuts if we add debt-free liquidity in the way of bullion based currency and give a helping hand to the whole economy and every sector that shares an interest in liquidity.

    The grass roots still have little idea how much of a powerful role they can play in their contribution by using debt-free gold backed currency. That’s the good news ! We can each support an increase in debt-free liquidity to support real economic activity, while also allowing for existing debt (fiat currency) to be removed and destroyed.

    • VB:

      Bullshit. “We” can’t add any liquidity. Bullion is not a currency. Central banks can add as much liquidity as they want – but it won’t solve anything, because the global economy is suffering from a solvency problem, not from a liquidity problem.

      • Crysangle:

        The solvency problem is the morrass of rehypothecated debt and obligation. It exists, is accounted under, fiat.
        Look at what happens when it shuts down. Look at Greece and capital controls, no matter the political motives partly behind their implementation. Guess what, a new economy emerges that uses other forms of token liquidity, a new economy that is part extension from the old one. It is/was openly based on new forms of liquidity.
        I appreciate your posing statements that demand explanation… there is life beyond fiat… Plus Ultra.

        • VB:

          Greece is a special case. There the solvency problem directly leads to a liquidity problem, because the country cannot print more of its medium of exchange and the entity that can do that is unwilling to do it on Greece’s behalf.

          It is pretty much equivalent to a US state going bankrupt with the Fed unwilling to print and give that state additional currency.

  • Kreditanstalt:

    Unless bona fide ‘Real Economic Growth’ -in REAL terms, after disregarding monetary expansion – returns, the entire economy will eventually be exposed never having left the 2008-2009 ‘crisis’.

    Sooner or later, governments in “developed” western welfare state economies will be forced to implement actual spending CUTS. When that day comes, Keynesianism and the myth of central bank omnipotence and efficacy will die.

    • zerobs:

      They will implement spending cuts over our dead bodies, literally. Entitlement spending will get cut by 1) drafting the indigent into military service (aka cannon fodder), and 2) means testing the remaining people out of a portion of their “entitlements” which by definition will mean old folks will get their social security payments cut and their medical care will require being on a waiting list which will be so long as to not actually be medical care.

  • therooster:

    Crysangle ….

    Gold is a market currency, yes. It’s by agreement. Nobody is forcing you to sell a man’s suit for gold payment.

    I think the “Borg standard” that some people have fallen into, is that a currency can only be deemed to be a currency if it is deemed to be legal tender. That’s bunk ! Bad habits ! Currency existed long before legal tender laws.

    Legal tender laws were instituted so that fiat currency could gain the market traction that it has in order to fulfill its “apprenticeship”, where that tenure served as a precursor for the the development of the light side (asset based liquidity) in the formation of the full yin-yang. Don’t lose sight of the order. It’s light that comes out of darkness in the proper order of creation. Where there is no floating measure to give gold scaleable liquidity, how could gold serve as a long term monetary solution ? Once complete, the yin-yang is symbiotic.

    If one wishes to stick strictly to man’s law (legal tender), then they are free to dwell on the dark side. This begs the question as to whether market law should have any bearing on the whole landscape within the FULL monetary model ?

    Gold is a market currency that subscribes to market law. It needs no proclamation by fiat. It is sovereign.

    Am I affiliated with that concept ? Damn right I am ! Rewarded too !

    VB … we’re still waiting for your fundamental argument. Your rant is getting tiresome. Are you knee deep in paper ?

    https://tomajjavidtash.files.wordpress.com/2014/12/yinyang.jpg

    • VB:

      Gold is not a currency, because it is not the medium of exchange.

      Your scammy spam is getting tiresome too, but I would counter it every time I see it.

  • therooster:

    We need to wake up ! We … as in the market …. the grass roots. We will continue to get “the stick” until such time that we reach for “the carrot”.

    Gold is now a real-time debt-free currency with fully scaleable liquidity, thanks to its floating price status. Monetization must be from the bottom-up this time around, however, because of the real-time environment and the very real threat to debt markets (and fiat currencies) if the implementation of real-time gold currency (as an addition) was top-down, by fiat of any sudden proclamation from the apex of power.

    Follow “the script” … necessary evils and all.

    We must be as a wise as serpents, yet as gentle as doves.

    http://BitGold.com/r/0UZxqF

    • VB:

      Affiliate scam.

      Oh, yes, and gold is not a currency.

      • Crysangle:

        Gold buys and sells cash, so I suppose you are saying it is beyond, or are you providing a new narrow definition of the word currency that limits itself to the point of transaction of a service or good? The latter makes no sense as we would have to narrow further to the simplest definition, that of an agreement of exchange, hence the will of two parties, which would have to include cash for gold, would it not?

        • VB:

          Currency is a medium of exchange. Gold isn’t that – nobody gets paid in gold and nobody spends it to buy other products directly – so gold isn’t a currency.

          Gold is a financial asset and a store of value – that’s it.

          It’s not even money – but, then, nothing really is money nowadays. Money has 3 properties: medium of exchange (i.e., currency), unit of account and store of value. Gold is only a store of value. Fiat money is only a medium of exchange and a unit of account. Therefore, neither of them is money.

      • zerobs:

        True. Gold is specie. Currency is merely a promise to pay, gold is the actual payment.

        • VB:

          No, you are confusing currency with fiat money. Currency is the medium of exchange. It can be gold, fiat money, seashells, slave girls, wheat, cigarettes – whatever is used as a medium of exchange. Currently, that’s fiat money – but it doesn’t have to be like this.

          Fiat money is a promise to pay. A hard asset (e.g., gold, but any other commodity would do) is the actual payment. In the past, the actual good was used as a currency. Currently, the promise to pay is used as a currency.

          • Crysangle:

            Hypothesis.
            Currency is that which is necessary to settle an uneven or incomplete trade, that which is an acceptable recompense but that is not directly needed. With debt as currency, fiat, we have reversed the role, we insinuate that debt may be repaid with debt, but with no means to sum the result.
            So fiat cannot be currency as it involves a vacant third party that is mistakenly understood to represent resolution.
            Yes, I understand that fiat is used as ( italics) a main currency, but it is not a true currency as its worth depends solely on subscription to debt, a mere notion, and one that breeds carelessness and the resulting need or excuse for forceful implementation of the authority of worth.

            • VB:

              If you start from an incorrect definition, you’ll reach an incorrect conclusion. :-)

              Currency is the medium of exchange. No more, no less. It allows person X who has good A and wants good B to trade with person Y who has good B but has no use of good A. So, person X exchanges his product A for some currency and then exchanges this currency with person Y for the product B. The currency just facilitates the exchange of goods. Ultimately, goods are always paid with goods. Currency makes it possible to do this indirectly. Nothing says that an exchange involving currency has to be “final”.

              • therooster:

                VB …. That’s a pretty good definition if there is no debt associated with the creation process for the currency. Not so good if there is, however.

                Even in the case of using a debt-free asset as the currency, let’s say tulip bulbs, it might be best to ensure there’s some aspect of supply discipline so that the perceived trade value of the currency doesn’t go the way of your post.

                Fiat’s creation number make for a good measure of value, where that measure serves a relative function in the trading of two debt-free widgets that have those same fiat numbers for their market value assessment (pricing) . It’s a tool for comparative relativity, when it’s at its best.

                The market is free to choose to make one of those debt-free widgets gold or silver or whatever in the context of creating a market standard.

                Of course, in order to arrive at fiat numbers to play the part of a relative pricing tool of acceptability by the market, the only way to do that is for those fiat numbers to play a currency role in the “apprenticeship” before being accepted as a useful pricing measure at all. The concept could not just be pulled out of someone’s ass ….. nor could it be a measurement of weight if any sort of return was to expected in the development of the trading system. Fiat currencies, unlike weight (as a measurement tool), are intellectual property and warrant a return for their use. That return can be two-fold. It can be interest when the fiat number is used as a currency (yin) and/or it can a transaction fee when the number is used to support a debt-free trade (yang).

                It is light that comes out of darkness in the process of creation. Give thanks to God.

                Pricing and settlement should be different mediums if any existing debt can be purged.
                Eg: Gold at $35/oz could only purge $35 of debt in the 1960’s. Today, it purges more.
                The ratio of debt-to-asset (USD/oz) can create a healthy or unhealthy balance in “the books”. Who sets the value of that ratio is also cause for consideration. Ideally, it should be that market if one believes in the “fullness” of market law.

                On that basis, the whole process of Bretton Woods now makes for a very interesting review.

                Did you really write what’s below or did someone write this on your PC …. ?

                VB:
                October 6, 2015 at 09:52

                No, you are confusing currency with fiat money. Currency is the medium of exchange. It can be gold, fiat money, seashells, slave girls, wheat, cigarettes – whatever is used as a medium of exchange. Currently, that’s fiat money – but it doesn’t have to be like this.

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