The Economy

<shrug> This site pays me by the word.

 

German central bank risks bailout after money printing spree

How'd that happen?

 

Get used to it. Shifting demographics has caused rapidly declining enrollments. Combine that with decades of stupid "policy" that ran up costs and got people used to a ridiculous fantasy with regard to higher education in this country. It means that dozens of flagship state schools are now dealing with pretty big operating deficits. Rutgers is looking at a $125 million deficit, Penn State. $150 million. It's widespread.

We would have seen this happening already a few years ago, except Federal covid money papered over failures and allowed them to kick some cans down the road. At the very least, the trend you are going to be seeing is these flagship state schools getting leaner, dropping departments and cutting staffing.

West Virginia University to slash budget with enrollment falling

 

Well, no. The difference between the Bundesbank and the Federal Reserve is that the Federal Reserve is insolvent too and is now taking on losses, but technically it can just keep printing more money (it takes a special level of incompetence to be legally allowed to print money and still take losses, doesn't it?).

The Bundesbank has no such ability. It needs to cover its losses.

As a primer: The ECB controls "monetary policy" for all of the European countries.. Its member countries have ceded their sovereignty to the group when it comes to the currency. You have one currency being administered by the ECB, but varying levels of fiscal discipline among the member countries. This has created a sovereign debt mess that has been papered over with a huge bond buying program that essentially turned Germany into a piggy bank for the socialist / fiscal nightmares that are Greece, Spain, Italy, etc. And they have spent the last 10 years pretending like they made everything OK. ... when they really just kicked a can down the road and created a day of reckoning in the future.

The ECB embarked on a massive quantitative easing program 8 years ago, when it was still reeling from the European debt crisis. Germany wanted no part of it, but it had no choice. They were outvoted. As a result, the ECB bought up trillions of euros worth of European sovereign debt in order to suppress interest rates (propping up Europe on the back of it), and they stuck the German Bundesbank with hundreds of billions of dollars worth of that debt.

It was all great while they could keep their thumb on the scales of finance. But that scheme ended when the consumer price inflation all of this eventually unleashed forced them to let interest rates finally rise, which is where we are now.

What is going on with the Bundesbank is the same exact thing that happened to Silicon Valley Bank. The Bundesbank was buying long maturity bonds. ... and when rates rose, those bonds lost a lot of their value. So they are now sitting on billions of euros worth of losses on their holdings. This is what QE did. ... central banks made themselves into the worst hedge funds on earth, not trying to buy low and sell high, but instead deliberately buying high (to drive down yields) and saying, "We'll worry about what it means later." It's now later (inflation made them let rates rise) and they are sitting on losses. The ECB could try to print the Bundesbank's way out of it. ... but that would be pouring gasoline on the inflation fire they are supposedly trying to put out, so they are backed against a wall.

The Federal Reserve is facing the same thing. ... it was making money on all of the debt it bought up as it suppressed intrest rates (and drove the value of those bonds artificially higher) and was handing over the profits to the treasury (think about how much like a ponzi scheme what they were running was!). It's now losing money (for the first time in its history) and it has negative equity capital. It has lost more than $70 billion since August, 2022. It has trillions of dollars of long-term investments at around 2 percent yield, but costing 5 percent to finance. Several banks in the U.S. recently were put into receivership for the same exact reason. The Federal Reserve Act allows this (it doesn't address losses due to interest rate risk, because nobody ever conceived they would create such a mess). It will have consequences in that it exacerbates the fiscal deficits we are running and puts more pressure on us.

The German Bundesbank can't just print their way out of it. It's not dire for the Bundesbank yet, but it does have to be dealt with. Germany can do a budgetary bailout (they probably are short single-digit billion euros). But they also have hundreds of billions of dollars of gold and foreign currency reserves, so for the time being they can carry forward their losses against future profits.