Spanish Bankia - a new bank+government perpetuum mobile

Today Spain announced it will nationalize its 3rd largest bank - Bankia. The government is preparing an injection of public funds (4,5 billion Euros = $5,8 billion) into the banking group in an effort to revive the confidence in banking system. In exchange it will get a 45% stake in the bank that holds 38 billions of euros of home estate loans. Half of them are problematic after the real estate bubble burst. It is expected the all money that is to be injected to reach 10 billion euros.

Nationalizing bankrupted banks is a "medicine" that started to be tested since 2008. Billions of public money went to pay for bad decisions of stupid bank managers with enormous salaries and bonuses. When there is a profit - it is for the bank. When a loss comes - it is for taxpayers :))) Brilliant system :)))

But let's look something other. What a funny system the banks and the governments have created - looking much like a perpetuum-mobile.

Banks are buying government bonds using newly printed money from the Central bank. When banks are with problems, the government comes and nationalizes them, using other money borrowed from other banks. When these banks collapse they are also nationalized. And so on... :) But when at the end the government defaults then this will default all the banks that has given money to it. And then the government will nationalize them to pay the losses. But how the government will pay, if it is defaulted, and exactly this default is the reason for banks' default :))

In Greece exactly this happened. The government stopped paying, the banks went bankrupt so the government warned them to raise their capital. If they don't do this, a nationalization will come. So the government makes the banks bankrupt ant then acquires them :)

Isn't it mad? Isn't all this mad? Is such a financial perpetuum mobile possible?

No. It is not possible. Economy is a resource limited system. No way for such magic. When resources are exhausted the system will crash.

Politics believe that the Central bank resources are endless. Formally this is true. But it is not endless the value of these "resources". This value is not guaranteed. We can always print money, but we cannot give a value for them. So the system will collapse again due to resource lack. It will be over flooded with enough money, but not with enough value in this money... :)

Banks are saving government when buying funny bonds. Government is saving banks when nationalizing them. Central bank is lending to banks. Banks are lending to government. Governments are funding bailout programs. Governments are using bailout funds. Governments are making troubles, governments are saving other governments from troubles... It's a kind of magic... :))) But not for a long...:)))

Spain is in a deep trouble. It has large debt and deficit, and the interest rates on its bonds are rising. It has no money, but spends much money on bank-bailouts. For funding this it relies on... Spanish banks... That rely on government for not going bankrupt... :)))

May 10th 2012

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