Why Everyday Europeans Are Bailing Out of Their Own Banks

Europe is begging for money but claiming it has plenty. Meanwhile, ordinary Europeans are voting with their feet and taking their money out of banks and up north, while they still can. An economic system based on command and coercion is collapsing. And meanwhile, stock markets and investors trundle along in an information-soaked stupor. Australia’s politicians descend even lower into utter economic stupidity with a new corporate tax idea.

That about sums up the state of play in the world. You could put today’s Markets and Money down now and you would know the important stuff. But, since it is our custom to flog a deceased equus, we’ll press on and show you why there is a much better way to organise the world’s economy based on voluntary free trade in which people are able to make themselves useful to one another.

By the way, it appears yesterday’s Markets and Money was blocked by some company spam filters. We have deduced why, but can’t obviously repeat the error. If you missed it, we discussed how tangible assets can be like a call option on future growth. Later this week Diggers and Drillers editor Dr. Alex Cowie will tell you about his six favourite resource ideas for 2010. Stay tuned.

First though, today is Wednesday. You know what means. Our mate Murray Dawes has posted his latest stock market update over at YouTube. Have a look. Murray tells us that: “The market is in no man’s land awaiting the outcome of the meeting in Europe on Friday. So today I have outlined pressure points in the market where I believe the opportunities will present themselves over the next few weeks. I still think the outcome of the meeting will be a ‘sell the fact’ event but we need to wait and see the market’s reaction before acting.” Click the link to watch Lord Slipstream’s brand new market update – for free.

Now, about the draconian European apparatchiks, the ones increasingly bereft of useful ideas and increasingly reliant on floating ridiculous rumours in the Financial Times to prevent private investors from fleeing the bond market in droves. These people are on borrowed time. You’ll know they’ve given up on their project when finance ministers and central bankers start retiring.

Oh wait, that’s already happening.

In any event, the latest rumour circulated by the FT before the equity market closed in New York last night is that Europe will have THREE rescue funds, not just one. The €400 billion European Financial Stability Fund (EFSF) was set to be replaced by the €500 billion European Stability Mechanism (ESM) by July of next year. But it turns out both are sorely needed here in Europe’s hour of need. And prior to Thursday’s big summit to save Europe, the FT leaked a story that the IMF would be involved in some way as well.

This is about what you’d expect from a bunch of public sector academics and bureaucrats who’ve spent their life spending other people’s money and currying favour with one another. They’ve designed a three-part bailout fund to save a currency union that’s hopelessly dysfunctional. They seem to have missed a really important point, though.

That really important point is that there’s no money for any of this. The EFSF needs more money. The ESM isn’t even funded. And the IMF doesn’t have enough money to bail Europe out. The only institution with enough money to bail Europe’s governments out is the European Central Bank (ECB). And the ECB doesn’t have the money either. It only has the power, in a roundabout way, to make more money.

So here we are. Europe’s plan is to convince private bondholders to buy government bonds by borrowing money from the ECB and accepting their guarantee that they will not, under any circumstances, be allowed to lose money. Right.

While Europe tries to con the rest of the world into buying its bonds, southern Europeans are staging an invisible bank run. Greek depositors see the writing on the wall and have been removing their money from the banking system, “on a large scale”. And it’s not just the Greeks.

Savers are taking deposits from Italian, Spanish, and French banks and looking to put them in banks of “core” European countries, where a sounder Euro might eventually reside. Ordinary Europeans are losing faith in the banking system and anticipating a breakup of the euro currency. This is the capital flight we described in our most recent issue of Australian Wealth Gameplan, titled “The Great Escape of the Blue Panda”.

By the way, yesterday we wondered how long it would take governments to start gagging the ratings agencies for communicating negative information on bonds to investors. Not long, it turns out! The European Securities and Markets Authority (ESMA…whoever the heck they are) has already been knocking on doors and looking for signs of “wrongdoing” at Moody’s, Fitch, and S&P.

Don’t get us wrong. The rating agencies have not exactly covered themselves in glory the last few years. They sold gold-plated credit ratings on collateralised mortgages during the housing boom. They somehow missed the risk. It is easy to miss things when you are being paid to miss them.

But our point wasn’t that the governments are right to persecute the ratings agencies. Our point was that you can hardly trust any of the information coming out of the mouths of the politicians, the bureaucrats, or the bankers. They are all fighting for their lives and for the system that guarantees them fat pay packets. And they’re all willing to throw each other under the bus to save their own skin.

Our point is that you shouldn’t get thrown under the bus…or run over by it. Heck, you shouldn’t even be on the bus. Get off the bus!

Dan Denning,
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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