Tag Archives: financial crisis

Is Another Market Crash Inevitable?

The new capital requirements for financial institutions – known as Basel III – has been widely discussed lately. The plan is to raise the bank’s capital ratio, not to avoid another financial crises, but to lower the frequency of them. Isn’t there a better solution? Well, J.S. Kim at SmartknowledgeU think there is…

“In crisis, we turn to our governments and bankers to help us out, a very foolish response since it is bankers and governments that have created this crisis.”


“Today, there is not a single government in the world that has provided an adequate or sustainable solution to our global monetary crisis,” the founder of the independent research and investment firm SmartknowledeU, J.S.Kim, writes in his latest newsletter.

Here’s the rest:

The most prominent criticism from Keynesian apologists regarding our monetary crisis is that there is no better system than the one we are using and that supporters of Austrian economics always complain but offer no solutions.

This simply is not true.

Rather, our global leaders refuse to hear or consider the solutions we present.

Because our global leaders’ “solutions” to our present monetary crisis are false “solutions” predicated on the guidance of bankers, there is ZERO CHANCE that the world will not be plunged into another financial crisis that is deeper than the one we experienced in 2008 despite the denials of our political and banking leaders.

Today, citizens desire real change, not change disguised as maintenance of the status quo that politicians and bankers offer to us.

Today, we are unfortunately afflicted with a state of learned helplessness.

In crisis, we turn to our governments and bankers to help us out, a very foolish response since it is bankers and governments that have created this crisis.

How can we expect real change from the perpetrators of this crisis?

Any real positive change that has benefited citizens has always been sparked not by the State, but by individuals.

Today, the results of our dependence on bankers and governments to produce change will result in certain failure and more restrictions on our freedom.

In my book, “The Golden Gift,” is an idea that I believe can revolutionize the current monetary system and ensure that the current global economic catastrophe of massive unemployment and currency devaluation that plagues nations in the Americas, Asia and Europe will be unlikely to ever repeat itself in the future.

Not only is this idea a relatively simple idea to implement but it would also impact humanity in a massively positive manner, from helping to alleviate poverty, to restoring peace between warring nations, to destroying the conditions that give rise to terrorism.

It is a simple idea yet one that would have profoundly positive humanitarian implications in an indirect manner as well as a direct manner.

And most importantly, it is an idea that could be implemented despite the strong opposition it would assuredly receive from Western governments and bankers.

While far from a perfect solution, I hope that my idea will spark a discussion that will eventually create an implementable solution if the one I have presented currently contains too many flaws.

I strongly believe that one must have, at a minimum, a basic understanding of the artificial framework in which we live where those in power constantly sell propaganda to us as truth, if we are ever to break free of their mental and psychological constraints.

J.S. Kim


I believe that we must explore the reasons why society holds so many widespread beliefs to be true that are not, and why we often hold beliefs so tightly for no other reason than the fact that someone, somewhere, at some point in our lives, ordered us to believe it.

If we can understand this, then perhaps we can awaken from our century long slumber.

And at least that is a start.

By J.S. Kim

Managing Director & Chief Investment Strategist


Related by the Econotwist:

Bank of Canada Puts Price Tag On Basel III

Central Bankers Propose To Propose Repo Clearing Arrangements

Bankers Hail The New Basel III Regime

Central Bankers Announces A Higher Form Of Capital Standards

Basel III And The Fawlty Towers

Will Basel III Crush the Global Economy?

Is Quantitative Easing An Attack On Your Freedom?

Beware: Global Asset Bubbles Growing!

6 U.S. Banks Collects 93% Of Industry’s Trading Revenue


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Bank of Canada Puts Price Tag On Basel III

According to analysis done by the Bank of Canada and the Basel Committee, the higher capital requirements for banks as agreed in the Basel III agreement, will reduce the economic growth in G-20 countries by 8,8%. In addition will the transition period of four year reduce the groups average GDP by 1.1%. However, governor Mark Carney of Bank of Canada argues that the long term benefits can be far greater if more regulations are added.

“The only benefit quantified is the gains to GDP resulting from a reduced probability of future financial crises.”

Mark Carney

More and more details about the central bank‘s Basel III agreement are surfacing. The new capital requirements that are scheduled to be implemented over the next eight years will be no problem for most banks, but for the rest of us will it probably make the recovery period longer and harder.

The full text of governor Mark Carney’s speech at the German Bundesbank’s annual meeting in Berlin this week is just  released by the Bank of International Settlements.

It’s quite an interesting read.

Together with the Basel Committee, Bank of Canada have estimated both the cost and the benefits from raising the capital requirements in the financial sector, and highlights the long term benefits that are assumed to be a 30% – 40% increase in the G-20 nations GDP.

Exactly how long the “long term” is, is not said.

But what’s perfectly clear is the the short term cost – the implementation period – will be substantial.

According to the analysis, the first 2% raise in the banks capital ratio will lead to an average fall in the G-20’s GDP by 5% (about 1,7 trillion euro).

The next step, up to 4%, will reduce the average GDP by 8,8% (almost 3 trillion euro).

In addition, the transition cost are estimated to an equal of 1,1% of GDP (around 370 million euro).

Filling up the banks will not only have a negative impact on economic growth for the rest of this decade, it will also cost us another 5 trillion euro.

Mark Carney

In this analysis banks are assumed to” fully pass on the costs of higher capital and liquidity requirements to borrowers rather than reducing their current returns on shareholders’ equity or operating expenses, such as compensation, to adjust to the new rules,” Mr. Carney points out.

Adding that the higher capital and liquidity requirements are “assumed to have a permanent effect on lending spreads, and hence on the level of economic output. No allowance is made for the possibility that households and firms may find cheaper alternative sources of financing.”

Before he makes the following punchline:

“The only benefit quantified is the gains to GDP resulting from a reduced probability of future financial crises.”

And that is 10 trillion euro, according to the analysis – long term, of course.

There Will Be More

Governor Carney’s speech also reveals a broad set of measures that currently are under consideration by the central bankers.

Banks can follow several strategies to meet regulatory demands for higher capital requirements, besides passing the cost on to the customers,  governor Carney points out.

“Consider the alternative. If banks were to reduce personnel expenses by only 10 per cent (equal to a 5 per cent reduction in operating expenses), they could lower spreads by an amount that would completely offset the impact of a 2-percentage-point increase in capital requirements,” he says.

The idea behind the Basel III arrangement is that higher capital ration will lead to less market volatility, and thereby increase economic growth.

“A much more significant impact can be expected from other macroprudential instruments under consideration. These include varying loan-to-value and other credit terms in mortgage markets, adopting through-the-cycle margining in core funding markets, and the introduction of countercyclical capital buffers,” the BoC governor told the audience in Berlin.

Also; “there is a range of initiatives under consideration to reduce moral hazard, including new frameworks for the effective resolution of banks, more intensive supervision of key institutions, the introduction of contingent capital, and the creation of more robust infrastructure.”

And:; “the totality of the G-20 reforms has the potential to shift the balance between resiliency and competition. By creating a system that is robust to the failure of a single firm, reforms could increase the competitive intensity in the financial services sector.”

According to Mr. Carney, the fundamental objective of the reforms is to create a system that efficiently supports economic growth while providing financial consumers with choice.

“This means ensuring that individual financial institutions are stronger and less systemically important, that more options for liquidity are available in all states of the world, and that the new measures promote competition.”

So, just to make it perfectly clear; the goal of this reform is NOT to prevent another economic crisis, just to reduce their frequency.

“A fully risk-proofed system is neither attainable nor desirable. The point is not to pile up so much capital in our institutions that they are never heard from again, either as a source of instability or of growth. The challenge is to get the balance between resiliency and efficiency right, governor Mark Carney of Bank of Canada concludes.

Here’s a copy of the transcript.

Related by the Econotwist:

Central Bankers Announces A Higher Form Of Capital Standards

Bankers Hail The New Basel III Regime

Will Basel III Crush the Global Economy?

Central Bankers Propose To Propose Repo Clearing Arrangements

In The Mind On Jean-Claude Trichet


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Is Mr. Barroso Really Competent To Be President Of The EU?

EU president Jose Manuel Barroso said in his first major speech in the European Parliament yesterday that EU have survived the economic crisis. He was either lying or do not have a clue what he’s talking about: According to a report from Standard & Poor’s, European banks have accumulated more than €30 trillion in liabilities that needs to be paid off or refinanced over the next two years.

“Banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks.”

Standard & Poor’s

European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to the report from Standard & Poor’s. The rating agency says banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other.

Europe‘s “banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks,” S&P says.

The total liabilities are €23 trillion for the euro-zone, while the UK, Sweden and Denmark account for 30%, or €8 trillion.

“The collective funding needs of Europe’s banks are vast. The industry is much larger than America‘s or Asia’s. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize  these loans and which do not require balance sheet funding,” says S&P’s credit strategist, Scott Bugie, according to The UK Telegraph.

The Greatest Vulnerability

According to the S&P report, published in July this year, the European Central Bank‘s emergency lending had inadvertently created a snare. Its three-month loans have had the effect of concentrating roll-over risk for large amounts of debt.

Banks will eventually have to refund these loans in a crowded market, competing with debt-hungry states:

ECB loans have contributed to a shortening of liability maturities.The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry.”

The Netherlands has already ended state debt guarantees, forcing its banks to go the market as bonds fall due.

Survival Of The Fittest

Others are following suit. Roughly €1 trillion of such debt in the euro-zone and Britain will come due by 2012.

“The need to refinance the maturing guaranteed-debt looms over many banks,” the rating agency says.

Stronger banks can cope: weaker ones will be left floundering in “a two-tier funding market”.

The EU’s €750 billion “shock and awe” rescue has gained time but not conjured away underlying concerns about the fiscal health of the EU states themselves.

The report came as the ECB’s latest bank survey showed that credit conditions had tightened sharply in the second quarter, with a net 11% of lenders restricting loans.

The survey was carried out in late June, after the €750 billion rescue but before the stress tests for banks.

Risk Of Double-Dip In 2011

“What it shows is that the sovereign debt crisis had a measurable effect on lending,” Silvio Peruzzu at RBS says, adding that rebound will lose steam if the banks are unable to boost lending as companies exhaust their cash buffers and start to borrow again.

“There is a risk of a double-dip in 2011.”

Mr. Peruzzo goes on saying the euro-zone is at a delicate juncture.

Germany has been powering ahead, lifting the much of the euro-zone with it, but the recovery is not yet entrenched. There are signs of a slowdown in the US and Asia that could prove infectious.

The risk is that a renewed growth lapse would put the spotlight back on the austerity policies in Club Med:

“Fiscal consolidation is not a one-off event. They go on for years. If down the line the markets start to question the debt trajectories of these countries, the banking systems will be tested again. There is €1 trillion of private debt in Spain linked to just one asset: property,” he says.

Much depends on whether the global recovery lasts long enough to lift Europe’s weakest states off the reefs, rescuing their banking systems, the UK Telegraph writes.

So, Where Have You Been, Mr. Barroso?

The above stand out in stark contrast to what the EU president, Jose Manuel Barroso, told the members of Parliament in his first major “state of the union” speech yesterday.

"It's all right now - in fact, it's a gas!"

“Over the last year, the economic and financial crisis has put our Union before one of its greatest challenges ever … As I look back at how we have reacted, I believe that we have withstood the test. Those who predicted the demise of the European Union were proved wrong,” the EU president said, and repeated EU’s pledge to attack risk-generating financial practices such as big bonuses, credit default swaps and naked short selling.

But as mention above; the problem is caused by the ECB’s lending practice, and the EU politicians eagerness to regulate the financial sector. Not “risk-generating practice”, nor “naked short-selling” or “big bonuses.”

I hereby raise the question: Is Mr. Barroso really competent to be president of the European Union?

Related by the Econotwist:

Barroso: EU Has Survived The Economic Crisis

Basel III And The Fawlty Towers

People’s Confidence In The EU Drops To Record Low

Morgan Stanley: Governments WILL Default

The Political Impact Of The Great Recession

Brussels Tells Athens To Shut Up And Take The Pain

Euro Drop To On ECB Statement, SNB Rumors



Filed under International Econnomic Politics, National Economic Politics