Just as The Privateer goes to press, a new development has exploded on the world scene. On June 23, the European Central Bank (ECB) announced its first ever offer of UNLIMITED one-year funds! The ECB has only done something like this once before, in a single ECB operation back in December 2007 when the world’s international payments system seized up. Then, Europe decided that this time, their internal payments system would not be allowed to freeze up as it did back in the early 1930s.
This Starts The Global Credit Crisis - Mark II:
Across the Atlantic in the US, the FDIC was the first cab off the rank in response. The FDIC said it will be guaranteeing $US 700 Billion of the debt of about 7,100 US banks and institutions in its transaction account program. Banks, including the biggest US lenders, can now tap UNLIMITED coverage by paying 10 cents per $US 100 on customers’ deposits. The FDIC has $US 13 Billion left of its own funds.
A Global Privateer Financial Appreciation:
What the ECB did back in December 2007 was a reaction to financial events which made the world’s international payments system seize up. The ECB hammered 348 Billion ($US 485 Billion) straight into the European payments system so that all the other financial participants could make or receive payments. This was a “one-off”! But now, the ECB has done it, again - on a scale which vastly exceeds what it did back in December 2007. This is not a “one-off”. This time, it is supplying unlimited funds for a year!
Measuring Possible Magnitudes:
The problem which the ECB sees rolling over the world horizon has to be of a near similar magnitude in size. Why otherwise open its doors again for unlimited funds? Further, why would the ECB keep its doors open for the issuance of these funds for a full year if the ECB did not expect this approaching world crisis to last for at least this length of time? Searching for answers to this, The Privateer can only use similar historical instances. The first of these has to be a gargantuan bankruptcy of a pillar of the western world’s huge “money center” banks. The second of historical instance has to be a debt default by one of the western world’s major governments! The third has to be a combined political and economic disaster. An example of this is when France refused to roll-over its loans to Austria’s Credit Anstalt in the late 1920s and then demanded repayment of its past loans. That demand brought the Credit Anstalt down. The Credit Anstalt, in a desperate attempt to get the funds and to repay France, called in its own loans to German commercial banks, in the process causing a fast sequence of bank failures across Germany.
In the early 1930s, western banks recoiled in horror from each other. They all started to recall their own short-term loans from each other while refusing to make any new loans. The entire western world’s international payments system broke down as the banks failed in their thousands all across the world. With this offer of unlimited funds, the ECB has acted to try to prevent a similar sequence, at least inside the Euro region. The European payment system will therefore survive - for at least another year.
