As I noted in my last post, of the largest banks in the world to go under in this recession, one was a German bank. The Sachsen LB bank had to be taken over by the Landesbank Baden-Wuerttenberg with help from the Saxony government in December of 2007. It turns out that there is reason to believe that part of the reason the German banks were so willing to help bailout little Greece with only about 2% of the GDP of the EU, was because many German banks are seriously over-extended. Let us look at a bit of background history on what is going on in Obama's idea of a socialist utopia, socialist Western Europe.
Socialists do not understand economics. They cannot because economics deals with the very complicated interactions of huge numbers of individuals trading huge numbers of values for other values. The socialist assumes that all economic activity can be dictated, controlled, regulated, and governed by a central planning authority in government. A real economy is much too complicated for that, but socialists insist in living in a Platonic dream world of pure economic forms. In this world, the complex multivariate interactions of a private sector are almost always shoe-horned into some simple-minded governmental industrial and trading policy such as mercantilism. Usually, the controlling government selects certain industries for their export potential and controls its currency to keep it artificially low in value in comparison with that of other countries in order to help keep its exports low in cost. The selected industries may also have many effective subsidies as well. This is what happened to Japan and brought its post-war recovery to an end in the 1980s and has left Japan in the doldrums ever since. China has shown recent problems with this also. So too does Germany show similar problems with its mercantilism policy.
Germany has a large export surplus with respect to most of the world and this includes the rest of Europe. What should happen in such a case is that the German currency should become worth more and go up in value relative to other currencies. The currency is rather like the stock in a country. When it proves itself to be productive enough to do well in the export market, its stock should go up. Imports from other countries then start to look very inexpensive and the country with the export advantage both starts losing that advantage and starts importing more. This tended not to happen in Germany even before the euro became the common currency of most of the European Union. The Germans had little choice but to put their money into savings, since it was too expensive to spend it on imports. The banks in turn had to find ways to invest that money. The German banks did this by loaning it to their many trading partners who had trade deficits with Germany. Many of these countries do not offer many good investments, so the German banks have become very good at losing the money that Germans save with them. The banks are under-capitalized.
Once most of Europe went to sharing a common currency, there was no longer even a possibility that the currency of Germany might go up in value relative to the currency of its net importers in other countries of Europe. The trade imbalance issues have actually become more acute. One of the reasons Germany was willing to put so much money into the Greek rescue plan was because French President Sarkozy furiously threatened German Chancellor Merkel with abandoning the common euro currency. The Greeks also had more leverage in negotiations than one would have expected. It turns out that a mercantile economy can be very fragile. How fragile?
The German government has put a ban in place on short selling. The mandate calls for a short selling ban in particular on 10 large German banks including Deutsche Bank, Commerzbank, and Allianz. It also banned the purchase of naked credit default swaps of European Union government bonds. This can be expected to have some negative effects:
- Large fixed income investors will be less able to adequately hedge their positions or be faced with insufficient market liquidity in the future to exit their positions. They will be driven to invest in other markets. The almost immediate stock market drop attests to this.
- The ban is a signal to the markets and investors that more bad news is coming. Investors are likely to lose even more confidence in European debt markets. Spain recently had to reduce the amount of national bonds it could sell due to too few takers, so this may already be manifesting itself.
Obama's socialist heaven, Western Europe, is not feeling well at all. Yet, it and Obama continue to criticize the free market of ideas, goods, and services that at one time characterized the U.S. and enabled it to become the economic superpower of the world. The U.S. became an empire of wealth, created by free individuals voluntarily trading values with one another as they wished with little governmental interference. This proven engine for economic growth is not in fashion in socialist Western Europe where unemployment rates of 10 to 20% have long been common, along with slow growth rates. Nonetheless, it is this model that our lying leader wishes to dictate that we adopt. This last week, he made major in-roads on this effort with the Dodd Financial Institution Take-Over. Obama sure knows how to use an "emergency" to take a firm grasp on ever more totalitarian power.