You can’t shoot yourself in the foot or kill yourself with a gun if you don’t have one.
That’s where the European Central Bank and all central banks with the IMF as their deputy dog come in. They issue loaded guns to bank outlaws.
The firepower that banks have to lend beyond their means and speculate in high yielding junk bonds of staggering governments, which is what Cypriot banks did when they bought Greece’s ugly-duckling bonds, comes from central banks.
There’s nothing new here. It’s the same old game.
It’s Russian roulette and the only way to stop it is to make all banks transparent and let them die when they shoot themselves. Or, we could just outlaw central banks.
Central banks are captive lenders of last resort. They serve the big banks they are supposed to regulate by always bailing them out when they get into trouble. They do that with the de facto backing of their sycophant constituent governments.
For the unenlightened, it works like this: Banks take in deposits and borrow in the capital markets, usually by issuing commercial paper, notes and bonds to raise more money which they lend out. To make money for themselves they reach for yield by lending to more speculative borrowers whom they can charge more interest to, and they too often lend to high interest paying governments whose junkie bonds they buy for a fat yield as well as their implicit security.
Security? Yep, because central banks are partnerships between governments and banks they aren’t inclined to let their governments down or their private TBTF (too-big-to-fail) bank masters.
Banks buy government bonds so governments can run huge deficits, otherwise they’d have to tax their citizens to pay for the largesse they dispense to voters, and raising taxes won’t get them reelected.
Sure fiscally irresponsible governments have to pay more interest to banks that buy the bulk of their bonds because they’re less “creditworthy,” but hey, it’s a partnership. You scratch my back…
The game goes on forever. If a government can’t pay, its debts get renegotiated, just like any other too-big-to-fail borrower. That’s where the Cypriot banks are at.
Where does the money come from to perpetuate the game?
Central banks are the lenders of last resort, only now they’re the first go-to lenders everyone has to run to because most of the world’s TBTF banks don’t trust each other.
It’s simple, without central banks facilitating the financing of the extend and pretend game, it ends. Banks will fail.
They should fail. But they won’t be allowed to because an insolvency anywhere is a threat to solvency everywhere. It’s a giant racket and taxpayers get caught at the net.
Printing money eventually results in inflation which robs everyone’s purchasing power.
Banks don’t care. They pay off their central bank loans with cheaper money. And when interest rates rise they can increase the interest rate spread they earn.
Cyprus is now holding the ECB’s gun to its own head. Either way, in the end, it will pull the trigger.
When the hammer comes down, if the chamber is empty, the ECB and Mr. Supposedly Tough Guy (or gal, in the case of Christine Lagarde), the IMF, will give the banks enough money to keep the game going.
If there is a bullet in the chamber, depositors will see some blood splattered but nobody is going to die.
The Russians will come to the rescue and co-opt Cyprus’ banking system by making Cyprus a Russian ward. Depositors will be made whole, Russia will wink at the EU and other EU countries will see that there is a way out of the Union after all.
That’s why this game really is a game of Russian roulette.