EU Moloch in a Fresh Bid to Inflate

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Brussels Alters Capital Requirements to “Spur Lending”

Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn’t enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact.

The political and bureaucratic classes will certainly never go back to sound money or free banking. The State’s paws will remain firmly embedded in the business of money, as the modern-day welfare/warfare states and the ever-growing hordes of cronies and zombies they have to keep well-fed have become utterly dependent on fiat money inflation. This will continue until the bitter end. New measures are now being designed to hasten its arrival.

3 EURO FRONT

Designed by Bjarke Ingels

Before we continue, ask yourself if the euro zone actually needs more monetary inflation – even from the perspective of those who erroneously believe inflation to be an economic panacea:

Euro area Money SupplyThe euro area’s money supply over time. We are on purpose using the narrow aggregate M1, which is the closest approximation to money TMS. The broader aggregates include items that are actually not money, but credit transactions. This leads to double-counting. Money= the means of final payment for goods and services in the economy, chart via ECB – click to enlarge.

It is fair to say that this expansion of the money supply hasn’t made society at large any more prosperous; quite the contrary in fact. It has however been beneficial to the State and others with first dibs on newly created money, as real wealth has been redistributed to these privileged groups.

One of the good things to emerge from the 2008 crisis was an almost complete halt to the issuance of additional fiduciary media by European banks over subsequent years. In other words, they temporarily stopped their inflationary lending, thus creating an opportunity for the liquidation of malinvested capital, which was deprived of oxygen as a result.

In several euro zone countries this has indeed happened, but the associated economic downturn has been needlessly aggravated by the ruling class doing whatever it took to keep the size of the State and its bureaucracies at the previous level even while the private sector imploded. Our guess at this point is that nothing short of a complete collapse will be able to change this. As long as there are still sheep that can be sheared (this is how the ruling class sees wealth creators, by and large), the Potemkin village will remain standing.

Anyway, further wealth redistribution steps have already been taken by the ECB, which is currently busy with a “quantitative easing” program (colloquially known as money printing). The parabolic chart of the money supply above is becoming even more parabolic, as the current annualized rate of expansion is close to 14%. Moreover, the central planners have already let it be known that they are thinking about enlarging these QE operations even further. Apparently, 60 billion euro per month is just not enough.

Support for new Crony Projects

Alas, Europe’s private banks and insurers have been hampered by new capital regulations designed to make them “safer”. This is the alternative to a sound, market-based monetary system: one that is drowning in ever more numerous and complex rules and regulations. In this particular case, financial repression measures have been combined with regulations forcing banks to hold more capital, by declaring government debt to be “risk free” and thus not requiring any back-up capital. This is an example illustrating the chutzpa of the EU’s political class, given that a few short years ago, the sovereign debt of several European governments was the focal point of a crisis – when in a brief moment of lucidity, market participants realized this debt cannot and won’t ever be paid back.

Banks have however so far felt forced to continue holding back with respect to credit extension to the private sector; otherwise they would soon run afoul the new capital adequacy rules. Now Brussels is looking to alter regulations again, this time for the express purpose of fixing this perceived deficiency – via asset backed securities.

“The European Union set out its plan for overhauling the securitized debt market, laying down criteria for a class of notes that will merit lower capital charges on holders as part of a broader effort to expand financing sources for companies and spark growth.

The regulations, which amend existing laws governing banks and insurers, cover all aspects of asset-backed debt, from origination to capital charges, supervision and risk retention. The centerpiece is a new class of “simple, transparent and standardized” products eligible for preferential regulatory treatment.

The European ABS market has shrunk almost 50 percent since 2010 amid stiffer capital requirements for holders and investors’ reluctance to buy the securities blamed for the financial crisis. While sales have rallied to 67 billion euros ($75 billion) so far this year from 58 billion euros in the year-earlier period, they remain far short of the 308 billion euros raised by this point in 2006, the busiest year for issuance, according to data compiled by JPMorganChase & Co.

“If the securitization market would return to pre-crisis average issuance levels and new issuance would be used by credit institutions to provide new credit, these would be able to provide an additional amount of credit to the private sector ranging between 100 billion euros and 150 billion euros,” the European Commission said in the proposal. “This would represent a 1.6 percent increase in credit to EU firms and households.”

(emphasis added)

The problem (which remains unmentioned by mainstream articles on this topic) is of course that modern banks are not merely intermediaries between savers and borrowers. Instead, they create more money from thin air when making loans. The amount of real resources and capital in the economy cannot be changed by creating new money though. The introduction of new money merely alters their distribution and the plans of those who employ these resources in business. As a rule, a great many misguided plans end up being adopted.

A few additional details were reported in the European press. One that struck us as especially noteworthy was that there will also be an attempt to “ease investment in infrastructure”. This is specifically aimed at insurance companies, which will be allowed to take greater risks when investing in one of the countless white elephants the bureaucrats in Brussels are regularly dreaming up in this context.

We have previously discussed how wasteful infrastructure projects subsidized and financed by the State in Europe are (see: “The EU’s Stalinesque 4-year Plan” or “The EU’s Ghost Airports” for some color on the topic). In brief, these infrastructure investments as a rule waste capital on a truly gargantuan scale. It cannot be otherwise, as bureaucracies are unable to engage in proper economic calculation. Any benefits that may flow from these projects are strictly incidental and are so tiny, they cannot possibly justify the associated waste.

Given that real capital is scarce, these projects invariably mean that a great many more urgent consumer wants will have to remain unsatisfied. So why is this done? Well, someone is naturally always benefiting. Assorted cronies – in this case mainly from the merchant class in the form of big business – are lobbying for getting a share, and they do indeed benefit (check e.g. in the article on “ghost airports” linked above how the contractors and airlines connected to these boondoggles are profiting regardless of the fact that these white elephants will never make a dime and are likely to simply fall into ruin as time passes).

An especially egregious case is the famous Calabria A3 expressway, which is built with EU funds. Construction activities have begun almost 50 years ago. The road is still not entirely finished. However, the project has been an unmitigated boon for the Calabrian mafia ’Ndrangheta. This was presumably not the plan – these are cronies too unsavory even for Brussels. In 2012 Italy was eventually forced to return a few hundred million euro in funding to the EU when the scandal over the countless kickback schemes characterizing this mafia-riddled project broke. The latest rumor is that this monumental boondoggle of a road will finally be finished after five decades of wasting money.

v2pg-24-Italy-A3-Glabb-ccPart of the “eternally unfinished” A3 expressway in Calabria. People often ask “who will build the roads if there is no State” – this boondoggle is a strong reminder that road building would be better left to anyone but the State.

Photo credit: Glabb

Conclusion

There is of course nothing inherently bad about ABS. We are not arguing in favor of creating any arbitrary regulatory obstacles to this asset class. The problem is rather that the intent seems to be to spur more inflationary credit creation and at the same time employ credit dirigisme so as the channel the funds into the types of projects the bureaucrats like.

The end result will be a structure of production that will continue to be out of line with actual consumer wishes, coupled with a further increase in risk to the financial system.