The European Union (mainly German taxpayers) and the International Monetary Fund (mainly American taxpayers) cobbled together a trillion dollars of loans and loan guarantees for Greece. That bummer bailout was supposed to save the Euro, the EU’s common currency. But the Euro is still in a nosedive and global stock markets are falling too. Why? In a word, the answer is debt.
The Bank for International Settlements (BIS) is an international banking organization based in Switzerland and not accountable to any country. BIS deals only with central banks or other international organizations. The below BIS chart here is viral on the Internet these days for two reasons: It is a striking work of modern art, and it is a graphic description of why the Euro is dying—runaway debt.
Banks and governments of these five countries, the “PIIGS,” owe trillions of Euros — the chart is in dollars — to Germany, Britain, France and others. The width of the arrows and size of the PIIGS give an idea of amounts of debt. One sees at a glance that a mere trillion dollars cannot solve such a colossal problem, and stock market investors know it. So the Euro may fall to parity with the dollar, even below it, and perhaps will even disappear.
Larry Kudlow, host of CNBC’s “The Kudlow Report,” recognizes this and, in words that appeared in The Daily Caller, suggests a trillion dollars is not enough. He says the bailout “must be expanded to include a blanket loan guarantee for all European bank debt, short term and long term.” Being an astute commentator on financial affairs, however, Mr. Kudlow knows the problem is not loans or guarantees. The core issue is the fact that Germans work much harder and save much more than do Spaniards, Portuguese, or Italians.
Until the socialist policies of Europe are reformed, Teutonic frugality and work ethics cannot stop the PIIGS from distorting the underpinnings of any notion of a common European currency. Unfortunately, riots tell us reforms are very unlikely unless they are forced by a financial meltdown and a depression. Then the red and black flags will appear again in Greece, Spain and Portugal. Stock market investors sense all this will likely happen and are rushing to the safety of gold and the dollar.
Gold we know—it is the final store of wealth. But the dollar? Now riding on the back of the flight from the Euro, the dollar itself will ultimately be a victim of President Obama’s profligate attempt to turn the United States into a European-style welfare state. Not only is federal government debt out of control, but states that follow his left-wing policies, like California, are sliding into the same slough of despond. As a result, their banks are unable or unwilling to lend to small businesses and create jobs. But not all states are like California.
Though the Bush and Obama administrations pumped trillions of dollars into banks via federal bailouts in hopes they would start lending again, it did not work. As a result, eight states have proposals in their legislatures aimed at creating state-owned banks to kick-start loans and create jobs. They are: Hawaii, Illinois, Massachusetts, Michigan, Missouri, New Mexico, Vermont, Virginia, and Washington. Candidates in those states are running on a state-owned bank platform: three Democrats, two Republicans, two Greens, and one Independent.
Beside the Texas oil tax gusher, only North Dakota has a budget surplus to help it survive the credit crunch that is driving other states into bankruptcy. That surplus and its state-owned Bank of North Dakota, the only bank of its kind in the United States, shield it from Wall Street and the lack of bank credit choking the rest of the country.
One advantage a state-owned bank enjoys is the notion of “fractional reserve lending.” That rule allows U.S. banks to lend up to ten times the money they have on deposit with the Federal Reserve. So by starting a state-owned bank, and by depositing its taxes in the Federal Reserve as seed money, a state can increase its use of tax revenue by a multiplier of ten and have funds to lend to farmers, small business, and others. A state-owned bank can also partner with private in-state banks by providing them back-up capital and taking loans off their books, making room for even more loans.
The real kicker is that a state-run bank can lend money to its state at no interest, or very low interest, instead of private banks that lend to the state at 6% or more. That is the blessing and the curse. If state-owned banks are run by a fiscally responsible state legislature that is dedicated to lending only to responsible borrowers, that is focused on paying off state debt, and that can resist spending the bonanza of ten times tax revenue on more welfare-state programs, then those banks become a vital tool for states trying to dig out of debt. Is California such a responsible state?
Then there is the White House and Congress. What will President Obama and his slavish Congress do when they realize states like North Dakota are multiplying their tax revenues and spending the funds wisely, instead of bailing out Greece and Wall Street? Do you think Washington politicians might stay up all night, thinking of ways to get at that money? Of course, we know that would be counter-productive and even unconstitutional.
We also know that has not stopped Mr. Obama, Ms.Pelosi or Mr. Reid yet.
Chet Nagle is the author of IRAN COVENANT.