States and banks have made a deal with the devil. Banks buy the sovereign bonds needed to prop states up in the tacit understanding that the states will bail them out in a pinch. But experts warn that this symbiotic arrangement might be putting the entire financial system at risk.
When he presented his proposals for taming banks in late September, Peer Steinbrück was once again spoiling for a fight. The Social Democratic candidate for the Chancellery in next year's general election railed against the chase for short-term returns and excesses within the sector and harshly criticized the "market-conforming democracy" in which politics and people's lives had become mere playthings of the financial markets.
Steinbrück's speech lasted half an hour, or a minute for each of the pages of a document he had prepared on the same issue. The paper lists a whole series of suggested regulations, most of which seem entirely sensible. Most interesting, however, is what's missing from the paper -- and what has thus far been absent from almost all of the proposals of other financial reformers: the disastrous degree to which countries are now dependent on banks.
As European countries have dug themselves deeper and deeper into debt in recent years, there has been a dramatic increase in this dependence. Governments are addicted to borrowed money -- and banks meet this need by purchasing sovereign bonds. As an unspoken reward, the banks expect nothing less than a guarantee of their own survival. Should a bank run the risk of collapse, the state is expected to use taxpayer money to prop it up. .............(more)