Wednesday, August 24, 2011

It's 2008, only more so.

Bloomberg reports:
European Bank Job ‘Bloodbath’ Surpasses 40,000
By Gavin Finch and Liam Vaughan - Aug 24, 2011

UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue.
But it's not just "the sovereign debt crisis" that's "crimping trading revenue", it's regulators' response to it.
The Basel Committee on Banking Supervision will require lenders to more than triple the core reserves they must hold to protect themselves from insolvency by 2019. Under Basel III, banks will be obliged to hold core Tier 1 capital equivalent to 7 percent of their risk-weighted assets, compared with 2 percent under the previous international rules.
Some key words from the article: "bloodbath","31% decline in Financial Services Sector Index," "71% decline in revenues," "fundamental restructuring of banking."

Perhaps a little "fundamental restructuring" is useful in a sector that had grown fat and delusional on the easy money of a worldwide credit bubble. But now that credit is scarce, and entire nations are imploding for lack of it, the additional regulatory capital overhead required by Basel III at this very time might constitute cruel and usual punishment.

That's because the excesses of credit bubbles are corrected by the mechanism of credit contractions. Credit contractions remove capital from the economy, as do regulatory requirements that banks set more of it aside. There is no need to impose additional capital requirements on banks, as long as they are subject to the discipline of the marketplace, which penalizes them for bad judgment and protects and rewards them for good judgment. The market is already imposing credit restrictions. Redundant capital restriction might be too much restriction. And the market will not cease to obey market laws; so the regulators ought to just let her do her thing.

If, instead of throwing countless billions of as yet non-existent dollars and euros at failing financial institutions to insulate them from the results of the credit contraction that they rightly have coming to them, regulators just let the market do its thing, there'd be no need to force banks to stash ever more amounts of precious capital in government bonds. The market would allocate the capital wisely away highly leveraged, high risk spots. That is, until the government can make money artificially "easy" again.

No, this is a clear example of two wrongs (1. "the Greenspan Put"; 2. Basel III) not making a right, but making an even greater wrong.

Unfortunately, it's not bureaucrats and bankers who suffer for this folly, it's the rest of us. The last time we saw investment banks "slashing" costs like this, it was in the summer of 2008, and we trust you recall what followed. If the investment banking industry is a leading indicator, as it has been for most of modern times, this is indeed a very ominous development for Europe.

For Europe, and for the United States, which invested billions of dollars of taxpayer money in bailing out European banks, this is an indicator of pending disaster of such a magnitude that the preceding 3 years could be considered only a warmup.

Who's going to bail Europe out of this next round? China? Nobody's buying their trinkets. The Arab nations? Demand for oil is tied straight to economic activity. Russia? Well, perhaps, as a pawnshop can be said to be "bailing out" a hapless pensioner, using her wedding ring as collateral.

Only the US can do it, and the US can only do it if our economy is unshackled from the ruinous policies of the Marxist Obama regime. We don't think the world can wait until 2012, though. It needs to begin now. And if it doesn't? All bets are off. Who knows how low we (the world) go, how much excruciating privation and social unrest everyman will suffer, or what sorts of tectonic shifts in geopolitical power result, if things simply continue as they are today.


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