Who is Europe really bailing out?

[Are_grits_groceries]

Tyler Cowen has some smart thoughts on the European Union's announcement of a $750 billion euro bailout fund:

1. The fundamental cause of the financial crisis has been people and institutions thinking they are wealthier than they are; this spread to Europe as well and now we are seeing the comeuppance.

2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged. The mechanics of the so-called "shadow banking system" -- namely the ability of short-term creditors to flee on a moment's notice -- remain in place.

3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared .

4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.

5. Here is one view, consistent with my own: "My quick thoughts on markets are as follows: great for risk assets, terrible news for bonds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations..."

More here. Remember that this is no more a bailout of Greece and Spain and Portugal than TARP was a bailout of subprime borrowers. The indebted countries are still looking at low growth, painful budget cuts, aching recession, high-borrowing costs, and an inflexible currency that will stop them from increasing their exports. Remember what Desmond Lachman said.

Rather, this is a bailout of the European banking system (and possibly some international banks), much like TARP was a bailout of our banking systems (and some international banks). The way people understand the European crisis is that a few countries hold much too much debt. But you can flip that around, too: Many banks loaned a few countries much too much money. And if those banks don't get paid back, they're going to go insolvent, and the banking system is going to freeze.

Intra-European resentment is probably going to protect the banks from becoming the villains here (Germans would prefer to blame the Greeks than Deutsche Bank), but they're a big part of the story. Note the New York Times' report on the market's reaction the bailout: "European banks were the early winners. In France, BNP Paribas soared 14 percent and Credit Agricole rose 16 percent; Germany’s largest bank, Deutsche Bank, gained 10 percent."
http://voices.washingtonpost.com/ezra-klein/2010/05/who_is_europe_really_bailing_o.html?hpid=topnews

Well, I feel better. NOT!
There are a lot of links at this site to more info.

[Demeter]

1. Can't Argue Facts

This was TARP 2, just as stupid a move as TARP 1. Covering over and hiding the problem instead of dealing with it, expecting some miracle of growth (or inflation) to wipe out the problem in the long run.

[kentuck]

2. And bad news for the citizens...

on all continents.

[ixion]

3. The same group the US bailed out

the top 1%.

[Cal Carpenter]

4. And the economic system itself that allows that 1%

to have so much political control and concentrated wealth.