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Dexia: Nothing New Under the Sun and Financing Failure

Took some time away from blogging recently distracted by a number of issues, including moving back to the US from Kyiv where I had been living for 18 months, transitioning to different clients work-wise and also finalizing a book I have been working on the past two plus years.

It is interesting to see that not much has changed world-wide as far as how central banks and governments around the world continue to panic at the least sign of a potential large bank failure. This week governments were aflutter about Dexia Bank of Belgium as its central bank, as well as the French central bank, are coming to the rescue (

Dexia Bank is an interesting case for a number of reasons.  First of all, it just received a bailout package three years ago from its government and I guess that went so well that another bailout may be in order. This parallels the well-publicized troubles of Bank of America in recent weeks which had a relapse with its stock back down near 2009 lows. This is after it was bailed out in early 2009 when the Merrill Lynch purchase threatened its long-term viability. I also recall during the 1980s that two of the largest banks in Texas during that period were bailed out and then they ultimately failed a few years later when the bank groups did not bounce back as expected: BancTexas and First City. So the history of bailouts reveals that many times the cure just does not take.  The way the bailout crowd explains it though is that bailouts are an elixir that cures all ills for a bank under stress.

Another interesting issue about Dexia is that just this past summer it went through the so-called “stress tests” by the European Banking Authority. Dexia passed with flying colors with an 11% capital ratio intact, well above the 10% ratio that its regulators had hoped for. This was the procedure that 91 of Europe’s largest banks went through to see how they could withstand the stress of a downturn. Seems the stress test was not so stressful, as it just assumed that sovereign debt would not cause any problems for Dexia. So the post-crisis panacea for addressing future stress of having banking agencies worldwide demand higher capital ratios and then intervene early to avoid bailouts seems to be coming apart before it was even fully implemented.

To loop back to a few of the issues I started with at the beginning of the post, have a look at a recent interview I had with the Wall Street Journal about my forthcoming book Financing Failure: A Century of Bailouts and the Independent Institute’s promotional page that provides a summary and some initial comments on the book itself.


  1. Hot tempered people (such as me) are quick to blow a fuse over "credit bubble banking" (lending out, by various book keeping practices, more money than was really saved by anyone), but the key test for supporters of the free market is not whether "credit bubble banking" is about, but whether bankrupt banks are BAILED OUT ("recapitalized") or not.

    Someone could support all sorts of interesting banking practices and still be a decent person. But once they start to support bailouts ("recapitalizations" or some other euphemism) the market is turned into a government rigged farce – corporate welfare has become the central principle.

    Of course government (and Central Bank) subsidies to the commercial banks go back long before 2008 (in the United States they go back at least to 1913), but in 2008 there was a vast orgy of subsidies for the banks – and two great lies were told to justify it.

    The first great lie was that the banks would "pay back" the money – this lie is still being told (we are told that the banks have "paid back" the money). In reality the banks have borrowed money (in various complex ways) from the Federal Reserve (which has created the money from thin air) and then lent it back to the govenment (the Treasury) at a higher rate of interest and the profit "earned" from this scam has been used to "pay back" the 2008 subsidies.

    It has been much the same with Europe – it is just that the subsidies (and the lending of the money back to governments) has (till recently) been a more hidden matter.

    The second great lie was that 2008 (both in the United States and Europe – because a lot of money went to European banks) was an emergency measure, that this was the end of it.

    We now see (with the endless demands for yet more bailouts by European banks) that there is no end to this orgy of corporate welfare.

    No one can, with any honesty, still support this financial system – it is utterly discredited and should be regarded with contempt and disgust by all human beings (regardless of their other political or economic opinions).

    It must go – and it will go.

    The question is as follows…..

    What will be emerge from the ashes of this system?

    Something better – or something even worse?

    That is the present and future conflict – between supporters of the free market, and those foes who wish to replace the present half-way-house system with full collectivism.

  2. Vern, congrats on your new book, as well as your interview with the Wall Street Journal.

    I agree with Paul's statement above that we appear to be in the midst of "a vast orgy of subsidies," and I'm wondering if you believe there are any concrete legal steps we can take now to stop this.

    In his last topic, George Selgin states: "… the 'central bank thesis' is the prevailing paradigm … and those who propose to challenge it represent but a tiny minority. There's no need for free bankers like me to contribute to the effort to refute free banking–there are plenty of persons pulling the rope that way. Our best contribution consists of mounting as strong a challenge as we are capable of doing, to see whether they can maintain their position or are forced to yield."

    Is there in fact any point at which central banking can be "forced to yield"?

    I've wracked my brains and can't see any realistic the federal government can do without the several Constitutional implied powers that a central bank possesses under McCulloch v. Maryland (1819).

    However, I do believe there are things we can do to affect the central bank in its capacity as a money-creator, which is the function that's causing most of the instability.

    Namely, we can all immediately begin objecting to Federal Reserve note denominated bank accounts and legally demand current U.S. coin-only accounts, which instantly forces the Federal Reserve to assume its subservient role as "fiscal agent" of the people's Treasury Department.

    Sure, there may be other more desirable or theoretical ways to control the Fed's influence—i.e, free banking, gold standard, campaigns to "end the Fed," elect the "right people," etc.—but none in which the Fed is legally "forced to yield" in the here and now.

    Ultimately I think "we have seen the enemy, and it is us," i.e., it's the mindless way we use money and relate to the banking system that causes a power vacuum, which central bankers rush in to fill.

    1. I think specific legal steps to address this problem are not easily defined.

      What the history shows is that many of the bailouts were done with new legislation that was rammed through in panic during the particular crisis accompanied by Chicken Little language about what would happen if legislation is not passed: Reconstruction Finance Corporation in the 1930s; TARP in the 2000s. What it will take is to have people in positions of power at the time of these future large financial institution failures that are aware of the history and know that the remedies just do not work and only make things worse off in the long run.

      The idea I see that has the potential for progress is to free up the market and put competitive pressure on central banks through alternative currencies which can run in parallel with the current monetary system. But until solutions like this reach a critical mass, I don't see that central banks will be forced to yield.

      1. Yeah, inertia and reaching critical mass is a funny thing.

        Jefferson nailed it when he observed that we " are more disposed to suffer, while evils are sufferable, than to right [our]selves by abolishing the forms to which [we] are accustomed."

        The phenomenon also reminds me of the guy who fiddled while Rome was burning. Apparently (and sadly), we haven't burned enough yet.

        1. Regarding inertia, I'm sure you've all heard the following passages from Bastiat's "The Law," but it wouldn't hurt to remind ourselves why we have such a high tolerance for illicit money-creation:

          Property and Plunder:

          Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

          But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

          Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

          When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor.

          It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.

          But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

          This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.

          Victims of Lawful Plunder:

          Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

          Woe to the nation when this latter purpose prevails among the mass victims of lawful plunder when they, in turn, seize the power to make laws!

          Until that happens, the few practice lawful plunder upon the many, a common practice where the right to participate in the making of law is limited to a few persons. But then, participation in the making of law becomes universal. And then, men seek to balance their conflicting interests by universal plunder. Instead of rooting out the injustices found in society, they make these injustices general. As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. (This objective would demand more enlightenment than they possess.) Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests.

          It is as if it were necessary, before a reign of justice appears, for everyone to suffer a cruel retribution — some for their evilness, and some for their lack of understanding.

  3. The Chicken Little language may be accurate – without massive bailouts the major banks (and the corporations closely connected to them) might well collapse. And a depression follow.

    However, there are two errors.

    Firstly people think "Great Depression" (the 1930s) – but the failure to revover in the 1930s was because of government policy (first Herbert "The Forgotten Progressive" Hoover then F.D.R) in the 19th century there were often banking collapses (sorry but even before the Federal Reserve credit bubble banking was about as stable as nitro) and the economy had indeed experienced depression (collapse of business enterprises, massive unemployment…..), but the economy was normally in recovery within six months or so (new banks formed, new enterprises taking over the factories of the bankrupt business enterprises…..).

    1921 was the last time the Federal government did not go into "do something" mode when faced with a crash – the only things that it did were CUT government spending by 25% (from a peacetime 1920 total) and NOT prevent markets clearing by prices and wages falling – and, sure enough, the American economy was in recovery within six months. Output expanded again, unemployment fell away, productivity rose, and wages could rise with it.

    Will America or any European countries follow such policies now?

    I doubt it – although a few East European countries might just surprise us.

    And the second error?

    Simple enough….

    The TARP fans (and the "Europe needs a TARP" people) think their wild bailouts "saved the financial system".

    They still do not understand that they have just delayed the collapse.

    And made it worse.

  4. On Rick's point about the legal position.

    As he knows there are two questions.

    Does the American government have these powers?

    We might say "no" (they are unconstitutioanl – streatching the words in Article One, Section Eight too far) – but the Supreme Court says "yes" (Second Greenback Case and so on).

    But there is also the question of "does the government have to use these powers?"


    The Congress could (by an ordinary Act of Congress) repeal the Act that created the Federal Reserve system.

    If you have a President and Congress that has any basic decency then you can get rid of the subsidies.

    Of course that is a huge "if".

    "And Britain Paul".

    A few members of Parliament are against this whole system.

    However, they could all fit into the room I am typeing this from.

    And it is not a very big room.

    By the way – one of the MPs (Steve Baker) is in a meeting in a House of Commons committee room right now (has been since 1600 British time) with a few friends.

    But that is about as far as we get here.

    We are like Walter Bagehot's (inaccurate) description of Queen Victoria (in his "English Constitution" book – a "classic" I despise).

    We have the power to "advice" and to "warn" – but that is about it.

    1. Paul, as you may know, the legal reasoning contained in McCulloch v. Maryland (1819), which Constitutionalized the First and Second Banks of the U.S., was also used to create the Federal Reserve.

      In short, the Constitution doesn't expressly authorize the creation of a central bank, but it was reasoned that the Constitution implies the power, otherwise the federal gov't would not be able to give effect to the following 8 expressed powers: (1) Necessary and Proper Clause, (2) Direct Tax Clauses, (3) Indirect Tax Clause, (4) Borrowed Money Clause, (5) Commerce Clause, and the clauses which empower Congress to (6) declare and conduct war, (7) raise and support armies, and (8) provide and maintain a navy.

      However, Marshall was crystal clear about the fact that no implied power can usurp or contradict any expressed powers, and under item #4, that's exactly what the Federal Reserve would be doing if it blocked anyone's legal demand for Treasury-Direct, coin-only bank accounts.

      This may not be immediately apparent, but the Borrowing Clause (more accurately, the Borrowed Money Clause) is what authorizes the issuance of non-coin or paper/electronic money. (Also, note that the central bank was never given power to coin money, and this is because the power is expressly and exclusively given to Congress. As I've mentioned before, believe it or not, the only money authorized by the Constitution is metallic coinage. Everything else, no matter how ubiquitous, and no matter how much it overshadows metallic coinage, is a form of substitute money or "borrowed coin," which is why I don't believe the Federal Reserve ever had a Constitutional right to issue a permanently irredeemable money substitute.)

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