Why banks fail

Europe is in the middle of huge economic trouble. The European states promise more to their voters than they can afford. Banks and financial institutions get much of the blame, but the real reason is simply public and private overspending in practically all of the countries, except those who are selling lots of raw materials (usually oil and natural gas).

However, there are some real problems in banks as well, and they have contributed to the situation. Politicians like to blame banks, investors (or "speculators"), rating agencies, etc. This allows them to shift the blame that simply belongs to politicians and voters. EU leadership wants to control rating agencies. This is a bit like when you are flying an airplane and you get very many warning lights in your cockpit that tell you about to hit the ground,  you react by reaching for a hammer and start smashing your instruments for incorrect operation. Yes, there may be faults in those indicators, but the time to do service is on the ground, not in flight. And not by the pilot who doesn't like what the lights say. Not when the rest of us are aboard this flight.

But what is really wrong with the banks? It is not that they make profits (if and when they do). It is not that they pay dividends. It is not that they pay huge sums of money in salaries and bonuses to their managers (although the latter is a symptom of the upside the banks had here: in the build-up of this governmental and inter-generation Ponzi scheme, they made fortunes.).

The problem is that the traditional separation between investment banking (which issues securities) and commercial banks (which accept deposits) was removed. This has created banks that have taken huge investment risks - such as investing in Greek government bonds. The same banks are also important for commercial operation of  the daily economy - basically they have bank accounts, yours and mine, and mortgages for homes, your and mine.  These banks are "too big to fail", but now they may actually collapse.

That is what makes the current economic crisis so much more difficult to handle: you can't easily just let the Greeks default and leave those evil, greedy vulture capitalists without their money. We have the deposits and pension savings of everyone at play, and our homes are mortgaged with funny money.

It looks like the U.S. effective repeal of Glass-Steagall Act - sponsored by Republicans, approved by a vast majority of Republicans and Democrats in the last years of Clinton administration with a Republican House majority - is the most serious blunder of the U.S. Republican party. It's not the Iraq war, it's not whatever spending or whatever tax cuts that Bush did. It's what they did in 1999 when Clinton was president. They messed up the financial markets.

In Europe, some similar development was done through the adoption of a single market in financial services, started 1987 and completed 1996. Now we see what it leads to in a dozen years.

Nevertheless, we shouldn't forget that the trouble of banks and other financial institutions is just a symptom. The fundamental problem in Europe is that politicians promise too much to their voters, and the result is that everyone is in debt. Public sector is in debt, and much of private spending is based on this debt as well. Europeans work much less than e.g. the Chinese, and it is difficult to understand how European leaders can expect poor, hard-working Chinese people to continue "lending" (i.e. donating) money to European central bank in order to keep up the frivolous spending practices of European welfare states where people can feed themselves without working. This is something where even North Korean news is more crebible than the eurocrats.

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