Seeking Alpha

Christopher Mah...'s  Instablog

Christopher Mahoney
Send Message
I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
My blog:
Capitalism and Freeedom
  • Europe's New Capital Rules Are Suicidal 0 comments
    Aug 12, 2013 1:16 PM

    "Overall, European banks need to shed €3.2tn in assets by 2018 to comply with Basel III regulations on capital and leverage, according to RBS. Eurozone banks have already shrunk their balance sheets by €2.9tn since May 2012 - by renewing fewer loans, repurchase and derivatives contracts and selling non-core businesses. Deutsche Bank recently said it would seek to cut its assets by about a fifth over the next two and a half years. Barclays, which announced a £5.8bn rights issue last month, said it wants to shrink its balance sheet by £65bn-£80bn.

    Europe's banking sector assets are worth €32tn, or more than three times the single currency zone's annual gross domestic product."

    --FT, today

    What is the #1 problem in Europe today: low growth. How does one stimulate real growth: increase nominal growth. How does one stimulate nominal growth: money growth. How does one stimulate money growth: grow bank credit. How does one grow bank credit: grow bank assets. For the economy to grow, bank balance sheets must grow.

    Now, if one wanted to retard growth and create a depression, what would one do? One would require banks to shrink their balance sheets. And that is indeed Europe's plan. Basel III will require European banks to call in loans, refuse to renew lines, and sell securities in order to raise their capital ratios.

    Here is the point: when banks shrink their balance sheets, they shrink their deposits, and when they shrink their deposits, they shrink the money supply. Shrinking the money supply reduces nominal growth. MV = PT. When M declines, so does PT. Europe is planning to shrink its money supply. How Hooverish!

    Mine is not a modern insight. It was identified by Fisher eighty years ago. Shrinking bank balance sheets reduce nominal growth. This is orthodox stuff.
    So Europe has decided to reduce M2 in the face of deflation and high unemployment.

Back To Christopher Mahoney's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.