<< Read More: How We Got Here: The Fed Warned Itself: Part 1
Long before Bear Stearns, there was Countrywide and a glimpse into the yawning abyss. But there was also Northern Rock, a UK bank, and a series of tremors and earthquakes rumbling across Germany. It was an entirely surreal period, as the once-mighty German system ground to a spectacular halt on, of all things, US subprime real estate “products.” At least that is the mainstream version, though, like most everything else, there is far more to it.
By February 2008, state-owned bank KfW had bailed out IKB Deutsche Industriebank which only led to an eventual “rescue” for KfW along with several others:
The list of casualties from the US subprime crisis is long and keeps getting longer. Financial institutions around the world have announced massive write-offs due to the credit crunch, with German banks such as WestLB and Sachsen LB being particularly hard hit by their exposure to obscure subprime-related investment vehicles.
All that led, after Lehman, to a full German state embrace of bailouts, massive in its size and attempted reach. Like TARP,
The €480 billion ($672 billion) package was approved by the government, whipped through the upper and lower houses of the German parliament and enacted — all in the space of five days.
Also like TARP, it didn’t work. No matter the size, Germany’s second largest bank, Commerzbank, was accepting a government bailout by January 8, 2009. The Berlin federal government took a 25% stake in the bank at the same time Deutsche Bank, the wholesale giant, was rumored to be looking at the option; at least as far as participation in the bailout umbrella, especially what would have been the favorable (to Deutsche) development of a single, huge “bad bank”. Along with remorseless UK bank troubles and nationalizations, these moves kicked off that last leg of the panic – all foretold by wholesale irregularities that continued in late 2008 such as the sudden and confusing appearance of negative swap spreads despite all the global and massive “rescues”. Traditional remedies, even in the size and reach of the post-Lehman global environment, were just no match for wholesale dynamics.
From the perspective of orthodox economics and monetary economics, none of this made sense nor has it cleared up any in the seven years since. From the perspective of wholesale finance, it makes perfect sense which is why reliance on central banks for rescues and solutions is dubious in multi-dimensional fashion.
At issue is, and remains, the “dollar.” The fact that Germany’s banking system ground to an emergency halt on US real estate structured finance proves, without ambiguity, the long ago death of the dollar and the emergence and domination of the “dollar.” As noted in Part 1, central banks operated under the self-guided delusion of the dollar while the “dollar” burned its way unalleviated and undeterred through the whole global economy. It was such a massive financial conflagration that we still are living its effects and with greater intensity of late.
While most convention still dwells on “toxic assets” and duplicitous lending and underwriting standards for the eventual panic, those are but symptoms of the causative transformation. The true nature of where all this came from, and where we are going, was captured in 1979 in a nondescript FRBNY magazine article that I quoted in that Part 1. I will reproduce it here as the risk of redundancy is overwhelmed by the necessary emphasis for ongoing clarity:
It has long been recognized that a shift of deposits from a domestic banking system to the corresponding Euromarket (say from the United States to the Euro-dollar market) usually results in a net increase in bank liabilities worldwide. This occurs because reserves held against domestic bank liabilities are not diminished by such a transaction, and there are no reserve requirements on Eurodeposits. Hence, existing reserves support the same amount of domestic liabilities as before the transaction. However, new Euromarket liabilities have been created, and world credit availability has been expanded.
To some critics this observation is true but irrelevant, so long as the monetary authorities seek to reach their ultimate economic objectives by influencing the money supply that best represents money used in transactions (usually M1). On this reasoning, Euromarket expansion does not create money, because all Eurocurrency liabilities are time deposits although frequently of very short maturity. Thus, they must be treated exclusively as investments. They can serve the store of value function of money but cannot act as a medium of exchange.
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