Draghi recently lost his customary cool after an unpleasant question on “collateral damage” from Italy’s first bail-in. Super Mario actually showing his nerves is a sign that this bail-in matter is popping many cans of worms.
- Was the Bank of Italy too busy politicking to stop Banca Etruria passing off junk as safe assets to families?
- Is the new EU bail-in legislation compatible with Italy’s constitution, whose section 47 explicitly provides for broad state protection of savings?
- Why was Berlin able to bail OUT its banks at a hefty cost of 280 billion Euros and with no questions asked, while Rome had to bail in ripped-off savers even before the new regulations kicked in?
That’s all been highlighted and discussed. What may still be off the public radar is that in a negative interest rate liquidity trap such events will occur again and again, since “normal” returns will require “abnormal” risks, and since banks are all the time seeing their interest margins evaporate.
It’s all driven by those deflationary forces repeatedly analyzed and explained by Alberto. Those forces devalue not only labour but savings as well. There is a monetary link between demand, investment, and profits. The devaluation of savings (which shows up in interest rates so low they actually become negative) further depresses investment with a perniciuous reverse-multiplier effect.
In such a world, a financial system dominated by private banks bound by “rules” (national or international as those rules may be) cannot pull the economy out of the quagmire. What is required is full use of fiscal and monetary policies tailored to each economy’s specific structure and needs: a thing impossible in the Euro system in which the basic rule is that such policies are not available to single states. So counties will be left with the option of either nationalizing their banks or running a flash sales of those bank assets abroad.
In practical terms that means that the Euro has become incompatible with “sovereignty” of bank shareholding.
Once Italy’s financial élite and its satellite political élite (both so far opportunistically Europhile) fully realize that, it’ll be fireworks. Get the popcorn ready.