9 Jan 2012

Can France lead Europe out the debt crisis?

(Cliquer ici pour une version en français)

As a resident in France since 1982, I am particularly excited about the possibility that it may be France that could lead us out of the global debt crisis. Some recent events give me real grounds to be optimistic. In this post I will talk about the possibility of using the Caisse des Dépôts to borrow money from the ECB.  In a second post, I will look at moves by Nicolas Sarkozy's government to introduce a Financial Transaction tax.

The first major event was the publication in Le Monde last week of a tribune by Michel Rocard and Pierre Larrouturou. Michel Rocard is a very senior and well-respected French politician who was prime-minister under François Mitterand. Pierre Larrouturou is also a well-respected economist - author of several books, including a very recent one called "Pour eviter le Krach ultime" - highly recommended. He has a blog here.

Rocard and Larrouturou put their finger on a truly amazing fact that has been ignored by virtually everyone. The pointed out that it was a total scandal that States have to pay interest rates 600 times those offered to commercial banks. I translated their text here.

They also pointed out something that I had also noted in my blog on the 1st of January.  It's the realization  that the widely accepted view that Mario Draghi and the European Central Bank are prohibited from lending to governments by the Lisbon treaty is a sham. It's a lie that has been propagated relentlessly by the media, and by politicians, including the German Government.

In fact, paragraph 2 of the infamous article 123 of the treaty specifically allows the ECB and other Central Banks to lend to "publicly-owned credit institutions". And when I specifically asked the ECB last wednesday whether such credit institution could lend to governments, the response was clear. They would be treated as banks, and as such, they are free to use ECB money however they like.

Hence, my "EUREKA" post on thursday where I argued that since the ECB has already made unlimited amounts of money available to any bank who asks for it - 479 billion euros on the 21st December - and since there is another "open day" programmed for the 29th February, the solution is there. Publicly-owned credit insitutions like, for example, the Caisse de Dépots in France can perfectly well borrow however much  money they want from the ECB at the same conditions offered to commercial banks (1% over 3 years), lend it straight to their government, who can then pay off the entire outstanding debt to the banks. The banks would no longer have the strangle hold that they currently have on governments, and which allows them to dictate government policy. They can threaten that the ratings agencies will take away your cherished triple-A rating, with the result that borrowing costs will go through the roof.  It's by using this sort of blackmail that  the banks have managed to extract 4.3 trillion euros from tax payers in the Eurozone between 1995 and 2010,  a number that  constitutes 3.73% of the GDP of all 17 countries. And with the increases in interest rates that the banks have been able to impose since the start of the so-called "Eurozone Crisis", the amount being siphoned off by the banks has now increased to €391 billion  a year, a colossal 4.25% of GDP.

As I have stressed, this cannot possibly be justified. Remember that, most of the time, the banks that "lend" money to governments don't actually have the money to lend. They just create it out of thin air by the "miracle" of fractional reserve banking. And even when the do have to get a bit more cash to keep their reserves at a minimum level, they just go cap in hand to Mario Draghi or Mervyn King who promptly hand over as much as they want at 0.5% or 1% interest. Furthemore, they have literally no risk. For 15 years they have been creaming between 250 and 320 billion euros out of the Eurozone economy every single year, despite the fact that the probability of sovereign default was effectively zero. Now, they have gone too far by insisting on totally obscene rates - 18% in the case of Greece for example. But they have just about killed the goose that has been laying the golden eggs for the last 15 years at least.

In fact, I can state that the goose really is pratically dead, because people like Rocard and Larrouturou (and I would modestly say myself to some degree) have seen the scam. The Wizard of Oz has been milking the system for decades, but the trick has now been uncovered. And the 99% will not accept this anymore.

So let's see how that might work in France. France currently owes the Banking System the grand total of 1,591 billion euros. Let us suppose that the Caisse des Dépôts, a public institution created in 1816, went to the ECB on the 29th of Feburary and said that it wanted to borrow 1,591 billion euros. Since the ECB's offer of cash is unlimited, this should not be a problem. The ECB just types a row of numbers into a spreadsheet, and bingo, the money is there. That's what Central Banks can do.

Now let's suppose that the money was immediately relent to the French Government at essentially the same interest rate (plus maybe a tiny extra bit), and the money immediately used to repay all the outstanding loans to the banking system. The immediate and obvious advantage is that the French government would only need to pay back at the ECB rate of roughly 1%, instead of the 3.41%  currently being imposed by the markets. That would save the French taxpayer 70% of the interest changes that are currently going straight to the banks - around 38 billion euros a year. Why go via banks when you can get the same money for much cheaper. Just cut out the middle man. After all, the banks do absolutely nothing to justify the massive charges they get.

Second, it would allow the banks that had lent to the French government to recover all of that money, and so that would stabilize the banking system by reducing the banks' exposure to sovereign debt. I note in passage that while you might think that handing 1,591 billion to the banks would give them a lot of money to play with, the fact is that since much of the money is purely fictitious, it will actually simply disappear into thin air when the debts are repaid. In other words, there will actually be little inflationary impact - one of the preoccupations of the German government. In fact, using ECB money to pay off Government debt is infinitely better for the stability of the currency than simply giving it to banks, as Mario Draghi and Mervyn King are so happy to do.

I can see absolutely no reason not to do this. If the French government doesn't do it, then they would clearly not be acting in the interests of French taxpayers.

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