Zombie Banks and Vampire Governments
by Gary North
The term “zombie banks” refers to banks that refuse to lend to the private sector. They are run by fearful bankers who do not trust other bankers. They do not trust many potential borrowers. According to legend, zombies survive by eating the brains of their victims. It seems to me that zombie bankers must be limiting their diet to brains of other bankers and investment fund managers.
Governments are ready borrowers of money lent by zombie banks. Zombie bankers think that their banks’ money is safer with sovereign nations’ IOUs than with other forms of IOUs. The governments siphon off the money that could have been lent to the private sector.
Zombie bankers in Europe keep lending to PIIGS governments whose leaders promise reforms. Politicians promise to cut spending Real Soon Now. So, bankers lend them more money. PIIGS’ sovereign debt interest rates then fall below panic mode, which is usually regarded as 7% or higher. When rates fall, investors then buy European stocks, because they believe that the financial problem in Greece is almost over, despite evidence to the contrary. All that investors care about is that government debt will be rolled over, somehow. This, European bankers are pleased to do for as long as they can borrow at 1% and lend at 6%. They love leverage.
The European Central Bank is providing the basis of this leverage. It is inflating the eurozone’s money supply. It is loading up on IOUs from commercial banks in the eurozone. This is a subsidy to commercial banks. The ECB assumes that commercial bankers will lend at high rates if they can borrow at 1%. The ECB is subsidizing zombie banks and vampire governments. It is killing two birds with one stone: fiat money.
If it loaned money directly to PIIGS, this would only indirectly benefit zombie banks. The PIIGS would make interest payments on time. But, by lending to the banks, the ECB directly benefits banks. The leverage restores their profitability. Best of all from everyone’s point of view, there is no legal showdown between the EU and the ECB. PIIGS governments continue to issue IOUs at a breakneck pace. There is a market for their IOUs because of the ECB. They can run up the bill with ease. The zombie banks are flush with digital cash.
THE ECB: “DIGITS R US”