In reaction to my Le Monde piece, Joseph Halevi (my close friend and co-author) send me an email, regarding the meaning of bank re-capitalisation, that started as short exchange which you, dear reader, may find of interest. Any comments?
Joseph Halevi: I have a big difficulty in understanding what bank re-capitalisation is and means. I can understand what it means for a productive firm: raising capital through equity (stocks) or through undistributed earnings, but a bank? Firstly, money is created by the bank itself. Secondly in the end, whether in a productive firm or in a bank, capitalisation means money tied up in assets as opposed to debt. Thus when Roosevelt “recapitalised” the banks he simply took over their shares, injected (i.e. gave) new money to the banks under new management rules, swapped (whenever possible) old for new stocks and that was it. In other words, it all boils down to giving money to banks. A similar situation happened in Italy in the 1930s only more drastically: they were nationalised, hence recapitalised not because they were more successful business wise but because they belonged to the State and the State guaranteed for them; that is, it covered all their losses and gave them additional monies. Thus outside the pseudo technical jargon of bank economics, recapitalisation means giving money to the banks. Since money is liquidity to begin with, banks should be required to use the money they get from the ECB to build up assets. The problem is that there aren’t any assets around which are safe except very low yielding US treasury bills, UK bonds, Japanese zero yielding bonds and über-alles low yielding bunds. Hence they cannot be recapitalised unless nationalised, then they can get safely all the money they need from the State, assuming the State has power of issuing as much money as it requires. Thus in the eurozone the problem is not the recapitalisation of the banks which can be done by fiat but the impossibility of doing it by fiat because the States do not have the power to generate and direct the money where they want or need to.
Yanis Varoufakis: You hit the nail on the head Joseph. What bankrupt banks need is money to keep the ATMs functional, at the very minimum, and, hopefully, start lending again. Since the Crisis began in the Eurozone, which effectively bankrupted the banks (as a result of their über-stupid leveraging, lending and investing in toxic assets pre-2008 behaviour), they have been constantly kept on a drip-feed by the ECB. The latest LTRO is simply a turbo-charged version of this type of liquidity-provision. However, the problem with such liquidity drip-feeding (or even massive injections a la LTRO) is that the money banks receive comes in the form of loans. The ECB effectively lends them that money on the basis of collateral (e.g. bonds, mortgages etc.). Given that (a) the banks have run out of collateral and (b) everyone knows that they simply cannot repay the ECB, they are sinking deeper and deeper into a zombie-like state. In this sense, the issue here is how to give them more money that they do not have to give back – and without having to post collateral (which they no longer possess). This is what we mean by recapitalisation!
What the bankers would like is for recapitalisation to proceed with no strings attached. That is, without having to hand over to society equity (i.e. common shares) in return for the money they get. In short, they are struggling to convince politicians to NOT do what Roosevelt (or the Swedes in 1992 for that matter) did. They want to have their cake and eat it! It is imperative that every decent human being mobilises to stop them from getting their way.
As you say, the only way of recapitalising them without effectively handing the bankers who bankrupted their banks a blank cheque (signed by those who are paying the cost of the Crisis that the bankers created), is to nationalise their banks (or, at least, for the state to take equity in proportion to the money it hands over to the banks). But, again as you say, in the Eurozone there is no state that can do this. I disagree. Since the money comes from the EFSF (which borrows it on behalf of the whole of the Eurozone), it is the EFSF that should receive the banks’ shares. In conjunction with the European Banking Authority and the ECB, they can then appoint new Boards of Directors, nurture the banks back to health and, finally, (when the time is right) re-sell these shares in the international money markets to re-pay the Eurozone’s citizens for the whole operation of cleansing the banking sector. This is precisely what Policy 1 of our Modest Proposal suggests.
Joseph Halevi: I agree with you. As for the EU, they give themselves institutions that could potentially act on a European wide basis but do not empower them and do not nominate directors that could act in that way. The whole thing boils down, in Europe, to the relation between the State and Capital. Actually labour, everywhere in Europe, is more willing to go on a European footing, perhaps less in Germany where the Unions, also the leftwing IG Metall, are tied to neomercantilism. The issue is European Capital. They want Europe as a free hunting ground, as guarantor of financial rents, as the enforcer, especially in the Eurozone, of wage deflation and the shifting competition onto the working populations who have to compete against each other. But EU Capital((s) do not want to let go of their own states. They view their own states as their protectors and as the instruments for struggling at the EU level. Elementary Marxism!