European Credit Dirigisme

Plan A

In its most recent monetary policy announcement, the ECB council introduced a new type of long term financing instrument, the so-called “TLTRO”, short for “targeted long term refinancing operation”. The reason is that the ECB has noticed that in the wake of its frantic – and ultimately successful – attempts to dissuade the market from punishing what are de facto bankrupt governments (there are only very few governments left in the world that are not in actuality bankrupt entities relying on a Ponzi finance scheme), lending to the private sector has plunged.

Let us recall the events surrounding the crisis. Beginning with Greece, Portugal and Ireland, it was suddenly realized that a number of governments in the euro area were actually on the brink of insolvency. The reasons were varied: in Greece, an inept and corrupt political and bureaucratic apparatus had for many years lied about the true state of the government’s finances. Everybody in Brussels knew of course that they had been lying. After all, they were already lying when they joined the euro, and a number of economists and a handful of conscientious Brussels bureaucrats alerted the European commission to this fact. It was decided to simply get rid of these critics by firing them, so as to proceed with a cover-up. However, this scheme obviously unraveled with the advent of the crisis.  In Ireland, the government had made the mistake – under pressure from various European institutions – to bail out its overextended and insolvent banks and in the process bankrupted itself.

From these humble beginnings (“the problem is well contained” was the widely heard refrain at the time), the crisis began to flower and soon included a few rather large, and partly “too big to bail” candidates, like Spain and Italy.

In the course of all this it was also discovered that Europe’s fractionally reserved banking system – surprise! – had flagrantly overtraded its capital and was completely insolvent as well. “Luckily” though, we have a fiat money system and a central bank, which means that the losses of banks and governments can be “painlessly” shifted onto the backs of savers and wealth generators in the economy via the printing press. After all, the US Federal Reserve had already shown the way (as had incidentally Japan some time earlier already).

But in the euro area there is a problem: since the central bank is a supra-national entity, there is an incentive for deadbeats to go on doing what they are doing simply because the losses they produce will actually be shifted to the tax payers and savers of other nations. This is why it took so long to come to a consensus and why the European solution actually included a measure genuine pain for a number of the worst offenders, or rather, pain for the citizens of these countries. The political and bureaucratic elite suffered no consequences at all, except for politicians who intended to break with the consensus and threatened to upend the “European Project”, such as Silvio Berlusconi. Apart from that, the State has continued to grow everywhere. 

In late 2011, the main problem was that both the Spanish and Italian governments were on the brink of becoming the next Greece: yields on their government debt exploded, as the market doubted that the ECB would bail them out (it should be noted that in reality, a massive ‘stealth’ bailout was already underway via the TARGET-2 payment system, which was used as a valve to replace private funding of current account deficits with central bank credit).