Saturday, June 16, 2012

The Fiat Monetary Rain in Spain has Drowned the Spanish Plains

Julie Andrews sang "the rain in Spain stays mainly in the plains" in My Fair Lady but these days Spain is profoundly suffering from a different kind of rain, namely Spanish banks raining fiat money into fueling a real estate bubble. The fiat dam has busted and now Spain is downing in bad real estate loans. At first it was reported that Spanish banks need a $40 billion bailout but then the bailout figure kept rising to $125 billion. But now Zero Hedge is reporting that Spanish banks really need $500 billion euros (about $650 billion US dollars).

Spain is very similar to Ireland, a nation that also destroyed its banks with a fiat real estate bubble. The Irish banks and their investors were bailed out by the Irish people who were forced into austerity to pay the banksters who covered the gambling losses of other banksters, here.

The remnants of Spain's collapsed real estate bubble are Spanish ghost towns, here, and a whole lot of severe economic misery.  The Irish have offered the Greeks advice.
Ireland has this banking advice for Spain : imagine the worst and double it.
Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.
“Think of the worst possible scenario on banking losses: then double it,” said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. “Adopt the most conservative assumptions.”
Read the rest here

Spain embarked on a real estate building binge that even surpassed the fiat real estate building binges in the US and Ireland. Yes, it was monumentally stupid and irresponsible but so long as central banks are creating unlimited supplies of 'out of thin air' money, the real estate developers will binge on borrowing and building, even if no demand exists for such significant increases in the housing and commercial building inventory. Of course, the laws of supply and demand do eventually kick in and bulging housing inventories are always accompanied by equally huge crashes in real estate prices, along with defaulted loans and empty buildings. When this happens, the banks are stuck with collateral of dubious value and are then forced to write the loans (bank assets) down to true market value. When the losses exceed the value of a banks' capital, the bank is bankrupt.

But the real issue is this: Who is paying for all these bank bailouts and who is being bailed out? Rich investors and bondholders are being bailed out. Bankster bailouts are nothing more than a wealth transfer from the poor and middle class to the rich.

To understand what is going on in Spain, it's pretty much a replica of what happened in Ireland and nobody tells the Irish story better than Michael Lewis in his book Boomerang. In comparing the US real estate bubble with the Irish real estate bubble, Lewis writes:  
The Irish real estate bubble was different from the American version in many ways. It wasn’t disguised, for a start. It didn’t require a lot of complicated financial engineering beyond the understanding of mere mortals. It also wasn’t as cynical. There aren’t a lot of Irish financiers, or real estate people, who have emerged with a future. In America the banks went down but the big shots in them still got rich; in Ireland the big shots went down with the banks.
But what the Irish government did next was unthinkable. It voted to guarantee the debts of Irish banks which then became the debt of the Irish people. The Irish government told the public that it must save the Irish banks. Lewis makes a most astute observation and discloses that the bailout of the Irish banks was nothing more than a bailout of bondholders:
…if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros’ worth of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the banks for 50 cents on the dollar-that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awaked to find his bonds worth 100 cents on the dollars. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that had gone wrong and didn’t expect to be repaid in full were handed their money back-from the Irish taxpayer.
Michael Lewis hits on a central component of the bankster bailout schemes.  The Troika (ECB, IMF and European Commission), and the Federal Reserve argue that the failed financial institutions must be bailed out with public money because the bank deposits of ordinary are at risk.  But Lewis shatters that scam with "if the Irish wanted to save their banks, why not guarantee just the deposits?"

Why bailout investors, stockholders and bondholders?  These are folks who voluntarily took a financial business risk and the lack of proper due diligence can and do result in bad investment decisions.  Yet, the central banks will not allow these folks to suffer the losses they deserve to suffer in a sane free market.  By covering the losses of investors who make bad decisions, the central banksters have effectively churned Wall Street, investment banks and brokerage firms into full fledged casinos where high flying gambles are covered by the public's house - the poor and middle class.

In discussing the AIG bailout fiasco, astute journalist Matt Taibbi succinctly summarizes the situation.
Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town – and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.
That’s it folks – our financial system in a nutshell. It’s all about Wall Street screwing Main Street, taxpayers and taking down the economy of the entire planet.

And that's precisely what happened in the US and Ireland, and is now happening in Spain. The Spanish people, like the American people and the Irish people, will suffer as the biggest highly rollers on the planet are literally given a license to suck on the taxpayers nipple when they lose at Wall Street's casino tables. 

Although human history is replete with many, many horrors, the poor and middle class bailing out the rich might just be one of the greatest ironies in all of human history, in addition to being its greatest heist.

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