Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins

As things stand, the banks are the permanent government of the country, whichever party is in power.

 – Lord Skidelsky, House of Lords, UK Parliament, 31 March 2011)

On March 20, 2014, European Union officials reached an historic agreement to create a single agency to handle failing banks. Media attention has focused on the agreement involving the single resolution mechanism (SRM), a uniform system for closing failed banks. But the real story for taxpayers and depositors is the heightened threat to their pocketbooks of a deal that now authorizes both bailouts and “bail-ins” – the confiscation of depositor funds. The deal involves multiple concessions to different countries and may be illegal under the rules of the EU Parliament; but it is being rushed through to lock taxpayer and depositor liability into place before the dire state of Eurozone banks is exposed.

The bail-in provisions were agreed to last summer. According to Bruno Waterfield, writing in the UK Telegraph in June 2013:

 Under the deal, after 2018 bank shareholders will be first in line for assuming the losses of a failed bank before bondholders and certain large depositors. Insured deposits under £85,000 (€100,000) are exempt and, with specific exemptions, uninsured deposits of individuals and small companies are given preferred status in the bail-in pecking order for taking losses . . . Under the deal all unsecured bondholders must be hit for losses before a bank can be eligible to receive capital injections directly from the ESM, with no retrospective use of the fund before 2018.

As noted in my earlier articles, the ESM (European Stability Mechanism) imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the Eurocrats (EU officials) demand. And it’s not just the EU that has bail-in plans for their troubled too-big-to-fail banks. It is also the US, UK, Canada, Australia, New Zealand and other G20 nations. Recall that a depositor is an unsecured creditor of a bank. When you deposit money in a bank, the bank “owns” the money and you have an IOU or promise to pay.

Under the new EU banking union, before the taxpayer-financed single resolution fund can be deployed, shareholders and depositors will be “bailed in” for a significant portion of the losses. The bankers thus win both ways: they can tap up the taxpayers’ money and the depositors’ money.

 The Unsettled Question of Deposit Insurance

 But at least, you may say, it’s only the uninsured deposits that are at risk (those over €100,000—about $137,000). Right?

Not necessarily. According to ABC News, “Thursday’s result is a compromise that differs from the original banking union idea put forward in 2012. The original proposals had a third pillar, Europe-wide deposit insurance. But that idea has stalled.”

European Central Bank President Mario Draghi, speaking before the March 20th meeting in the Belgian capital, hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place” – two but not the third. And two are not enough to protect the public.As observed in The Economist in June 2013, without Europe-wide deposit insurance, the banking union is a failure:

[T]he third pillar, sadly ignored, [is] a joint deposit-guarantee scheme in which the costs of making insured depositors whole are shared among euro-zone members. Annual contributions from banks should cover depositors in normal years, but they cannot credibly protect the system in meltdown (America’s prefunded scheme would cover a mere 1.35% of insured deposits). Any deposit-insurance scheme must have recourse to government backing. . . . [T]he banking union—and thus the euro—will make little sense without it.

All deposits could be at risk in a meltdown. But how likely is that?

Pretty likely, it seems . . . .

What the Eurocrats Don’t Want You to Know

Mario Draghi was vice president of Goldman Sachs Europe before he became president of the ECB. He had a major hand in shaping the banking union. And according to Wolf Richter, writing in October 2013, the goal of Draghi and other Eurocrats is to lock taxpayer and depositor liability in place before the panic button is hit over the extreme vulnerability of Eurozone banks:

European banks, like all banks, have long been hermetically sealed black boxes. . . . The only thing known about the holes in the balance sheets of these black boxes, left behind by assets that have quietly decomposed, is that they’re deep. But no one knows how deep. And no one is allowed to know – not until Eurocrats decide who is going to pay for bailing out these banks.

When the ECB becomes the regulator of the 130 largest ECB banks, says Richter, it intends to subject them to more realistic evaluations than the earlier “stress tests” that were nothing but “banking agitprop.”  But these realistic evaluations won’t happen until the banking union is in place. How does Richter know? Draghi himself said so. Draghi said:

 “The effectiveness of this exercise will depend on the availability of necessary arrangements for recapitalizing banks … including through the provision of a public backstop. . . . These arrangements must be in place before we conclude our assessment.”

Richter translates that to mean:

The truth shall not be known until after the Eurocrats decided who would have to pay for the bailouts. And the bank examinations won’t be completed until then, because if any of it seeped out – Draghi forbid – the whole house of cards would collapse, with no taxpayers willing to pick up the tab as its magnificent size would finally be out in the open!

Only after the taxpayers – and the depositors – are stuck with the tab will the curtain be lifted and the crippling insolvency of the banks be revealed. Predictably, panic will then set in, credit will freeze, and the banks will collapse, leaving the unsuspecting public to foot the bill.

 What Happened to Nationalizing Failed Banks?

 Underlying all this frantic wheeling and dealing is the presumption that the “zombie banks” must be kept alive at all costs – alive and in the hands of private bankers, who can then continue to speculate and reap outsized bonuses while the people bear the losses.

But that’s not the only alternative. In the 1990s, the expectation even in the United States was that failed megabanks would be nationalized. That route was pursued quite successfully not only in Sweden and Finland but in the US in the case of Continental Illinois, then the fourth-largest bank in the country and the largest-ever bankruptcy. According to William Engdahl, writing in September 2008:

 [I]n almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks [and] take over their management and assets … In the Swedish case the end cost to taxpayers was estimated to have been almost nil.

Typically, nationalization involves taking on the insolvent bank’s bad debts, getting the bank back on its feet, and returning it to private owners, who are then free to put depositors’ money at risk again. But better would be to keep the nationalized mega-bank as a public utility, serving the needs of the people because it is owned by the people.

As argued by George Irvin in Social Europe Journal in October 2011:

[T]he financial sector needs more than just regulation; it needs a large measure of public sector control—that’s right, the n-word: nationalisation. Finance is a public good, far too important to be run entirely for private bankers. At the very least, we need a large public investment bank tasked with modernising and greening our infrastructure . . . . [I]nstead of trashing the Eurozone and going back to a dozen minor currencies fluctuating daily, let’s have a Eurozone Ministry of Finance (Treasury) with the necessary fiscal muscle to deliver European public goods like more jobs, better wages and pensions and a sustainable environment.

A Third Alternative – Turn the Government Money Tap Back On

A giant flaw in the current banking scheme is that private banks, not governments, now create virtually the entire money supply; and they do it by creating interest-bearing debt. The debt inevitably grows faster than the money supply, because the interest is not created along with the principal in the original loan.

For a clever explanation of how all this works in graphic cartoon form, see the short French video “Government Debt Explained,” linked here.

The problem is exacerbated in the Eurozone, because no one has the power to create money ex nihilo as needed to balance the system, not even the central bank itself. This flaw could be remedied either by allowing nations individually to issue money debt-free or, as suggested by George Irvin, by giving a joint Eurozone Treasury that power.

The Bank of England just admitted in its Quarterly Bulletin that banks do not actually lend the money of their depositors. What they lend is bank credit created on their books. In the U.S. today, finance charges on this credit-money amount to between 30 and 40% of the economy, depending on whose numbers you believe.  In a monetary system in which money is issued by the government and credit is issued by public banks, this “rentiering” can be avoided. Government money will not come into existence as a debt at interest, and any finance costs incurred by the public banks’ debtors will represent Treasury income that offsets taxation.

New money can be added to the money supply without creating inflation, at least to the extent of the “output gap” – the difference between actual GDP or actual output and potential GDP. In the US, that figure is about $1 trillion annually; and for the EU is roughly €520 billion ($715 billion). A joint Eurozone Treasury could add this sum to the money supply debt-free, creating the euros necessary to create jobs, rebuild infrastructure, protect the environment, and maintain a flourishing economy.

_________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

 

36 Responses

  1. Reblogged this on All Things Bitcoin and commented:
    If you’ve been waiting for a sign to buy Bitcoin, here it is.

  2. Reblogged this on All About 2012 and commented:
    Remember Cyprus, last April? If you’ve been waiting for a sign to get your money out of the banks, here it is.

    • Hard assets, even a little gold is going to be all that will is left…if you can hide it well enough !…and I fear the USA is “next”.

      • …that WILL be left…sorry

      • Yes but the IMF is looking at stealing our assets, they just haven’t figured out how to do it yet. I suspect it will be through taxation. There’s nothing to stop them issuing a confiscation order on gold as they did during the depression of the 1930’s or simply imposing a crippling tax on ownership or when sold, and the politicians will claim it’s in the interest of ‘fairness and equality’, people will happily buy into that because most won’t have gold.

        • “the IMF is looking at stealing our assets”–no doubt about that; it’s what they do. Maybe they’ll confiscate the gold at the present $1300 then let it rise to $4k, similar to what happened under Roosevelt. Of course they don’t want ordinary people to profit from the inevitable steep rise in precious metals values
          as the international dollar (petro-dollar) is dethroned. Similarly, if a two-tiered dollar–with the domestic version to be steeply devalued and the international version to hold it’s value to please the Chinese–is in the works as Jim Willie contends, it would be a way for them to rip-off ordinary people’s cash assets: instant austerity.

  3. I’d make three points.

    1. The possibility of a “bail-in” makes it essential that depositors spread their deposits among many banks, preferrably smaller ones, and credit unions and state banks. (Go Ellen!)

    2. The news that Citibank is too big to run has finally surfaced. (If you’ve had any dealings with CIti you know that it’s been too big to manage for some years.) The solution is to break up the largest banks into their business units and distribute the shares to the existing shareholders. We did it with AT&T and it worked wonders.

    3. The “bail-in,” coupled with the primacy of derivatives in any financial crisis or disaster indicates that the system is too stressed to survive in its present state. A partial answer is to wind-down derivative exposure, pair off where possible and begin the process of declaring various classes of derivatives null and void.

    • …yes, and get rid of the trail of malfeasance and maleficence as well by reinstating Glass-Steagall and better…world-wide, getting that judge to reverse his ruling on the FDIC fully insuring derivatives, and rescinding Bush-s’ bail-in legislation, which he signed in ’05, setting the stage for first Cyprus, then Detroit…and all our big cities eventually.

  4. […] Ellen Brown WebOfDebt.com March 29, […]

  5. It’s now official. Theft by Banksters is now legal.
    It’s interesting to note that, when the Banks in Cyprus were closed(because people were queing to take their money out), while the government rushed through to “bail in” laws to allow a10% confiscation of depositors funds, Russian Oligarchs with billions of dollars on deposit because of favourable interest rates, were able to transfer their money through the Cypriot Banks London office, to escape the bail in.

  6. […] By Ellen Brown, Web of Debt   This piece first appeared at Web of Debt. […]

  7. […] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog March 29, […]

  8. […] This piece first appeared at Web of Debt. […]

  9. Holy cow Ellen. This just seems to be getting scarier by the minute. My thought is why create laws as you’re pointing to unless you think there will be a need for them. This leads me to believe they think or know a collapse is coming and they’re setting us up.

    But if they do that, the cat will be out of the bag and there’ll be nothing to hide anymore and the masses will know them for the thieves they are.
    That I think, would create an upheaval worldwide, never seen before in history.

  10. […] ellenbrown.com/2014/03/29/ban… […]

  11. […] Web of Debt – by Ellen Brown […]

  12. I always wonder what the interest of the American internet left is in what we Europeans do in our own countries! I can’t imagine that many American “leftists” have money invested in European banks, so why should they need to worry what we do? The reference to “Eurocrats” is amusing, particularly coming from a lawyer. All EU law is made by the elected governments of the Member States acting together in the Council. EU officials can “demand” things of the Member States only in so far as those Member Sates have previously authorised the officials to do so and, like all legislatures, the Council can withdraw or amend that power as it chooses. That’s my lawyer’s answer!

    • It’s of interest to Americans because the bail-in template has been imposed by the Financial Stability Board on all the G20 countries. The Eurozone is just going there first. Plus, for me, my daughter lives in Basel. I imagine the EU is about as democratic as the US is, meaning not very. The people of Cyprus didn’t vote to have their deposits taken; they campaigned vigorously against it. The Cyprus government protested as well. It was the troika that imposed the bail-in — the IMF, ECB and European Commission. The ESM wasn’t passed by a democratic majority of voters. I’ve written on that elsewhere. My concern is that Europe has fallen under the control of the big international banks, and so have we.

  13. […] Ellen Brown Web of Debt […]

  14. “a joint deposit-guarantee scheme” like FDIC is nothing more that a new big scam, as we know that money is created through accounting magics. Here is a paper explaining how it works: “Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government–and not the states or private firms–can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it.” In our EU case, they will just phone Draghi with a gun at hand. http://mises.org/daily/6387/Anatomy-of-the-Bank-Run

  15. […] by Ellen Brown, Web of Debt: […]

  16. […] Go to Original – ellenbrown.com […]

  17. Reblogged this on Adrian Rowles ACSI and commented:
    The real story for taxpayers and depositors is the heightened threat to their pocketbooks of a deal that now authorizes both bailouts and “bail-ins” – the confiscation of depositor funds.

    The Unsettled Question of Deposit Insurance;
    But at least, you may say, it’s only the uninsured deposits that are at risk (those over €100,000—about $137,000). Right?
    Not necessarily. According to ABC News, “Thursday’s result is a compromise that differs from the original banking union idea put forward in 2012. The original proposals had a third pillar, Europe-wide deposit insurance. But that idea has stalled.”

    Two pillars are now in place” – two but not the third. And two are not enough to protect the public. As observed in The Economist in June 2013, without Europe-wide deposit insurance, the banking union is a failure…

  18. […] Banking Union Time Bomb – Eurocrats Authorize Bailouts AND Bail-Ins – Ellen Brown […]

  19. […] Read More […]

  20. […] Quellen:Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-InsEU makes bank creditors bear losses as Cyprus bail-in becomes blue-print for rescuesEU Reaches Deal on Banking UnionThe European Stabilization Mechanism, Or How the Goldman Vampire Squid Just Captured EuropeEurope’s banking union – A la carte and half-bakedECB’s Draghi: Knowing Too Much About Our Big Banks Could Set Off A Panic […]

  21. […] Ellen Brown writes at Web of Debt: […]

  22. […] Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins The problem is exacerbated in the Eurozone, because no one has the power to create money ex nihilo as needed to balance the system, not even the central bank itself. http://ellenbrown.com/2014/03/29/banking-union-time-bomb-eurocrats-authorize-bailouts-and-bail-ins/ […]

  23. […] Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins The problem is exacerbated in the Eurozone, because no one has the power to create money ex nihilo as needed to balance the system, not even the central bank itself. http://ellenbrown.com/2014/03/29/banking-union-time-bomb-eurocrats-authorize-bailouts-and-bail-ins/ […]

  24. […] Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins The problem is exacerbated in the Eurozone, because no one has the power to create money ex nihilo as needed to balance the system, not even the central bank itself. http://ellenbrown.com/2014/03/29/banking-union-time-bomb-eurocrats-authorize-bailouts-and-bail-ins/ […]

  25. […] Source: ellenbrown.com […]

  26. […] Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins […]

  27. The above scenario is not far-fetched. Recently in Cyprus depositors lost money. In the US, banks have failed before without returning a penny to depositors (which was why federal insurance was created). Presently US banks help themselves to depositor’s money via nit-picking fees and closing one’s account to end a dispute (while keeping the money).

    Banks also charge usurious amounts for their credit cards, which profit the banks handsomely.

    Plus, banks play a big role in creating inflation, and do not pay depositors enough interest to keep up with the constant rise in prices.

    Further, banks promulgate the modern custom of borrowing to buy land (rather than renting from one’s community). Banks profit enormously from mortgages (both principle and interest). It must be society’s servicing of its mortgage debts that gets included in the figure above — 30%-40% of the price of everything you buy going to lending banks — otherwise that percentage seems way too high.

    While bighearted reformers want government to take over banking, that does not reduce our demand for loans. Our need for debt is artificially high. It gets exaggerated by our purchases of land and resources.

    If we rented locations from our community — as residents and businesses do in Hong Kong, Israel, US port districts, and elsewhere — then the demand for borrowing funds would drop dramatically and bankers would be cut down to size.

    That said, letting the public treasury perform some banking functions might not be a bad idea, even if it does not get to the root of the money problem. More at progress.

  28. Introduction to Bank Recapitalization

    http://iakal.wordpress.com/2014/05/12/bank-recapitalization/

  29. […] By Ellen Brown […]

  30. […] that create what we use for money as ever-increasing total debt must be “bailed-out” and “bailed-in” because debt causes prosperity. The more debt created by banks, the more prosperous we all are. […]

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