Euro Crisis: “The [banking] system is based on bad maths and appalling computer models”

Whilst we are waiting for half the European world to implode amongst a whole heap of grumbles about the costs of Greek social entitlements (free buses in Athens for one), Bryan Appleyard’s perspective is worthy of note:

Actually, no kind of state will work if it hires banks to conceal its debts in order to qualify for euro-membership. They key words in that sentence are, of course, ‘hires banks’. The welfare state is expensive but not, ultimately, as pricey as the banks which have to be bailed out and propped up every time they lose all their money which they do repeatedly, throwing people out of work and costing us even more. The present structure of the banking system is only a couple of decades old and it doesn’t work.

If we are to survive this crisis, it will have to be made illegal. The system is based on bad maths and appalling computer models, on, in fact, machines and it is dependence on machines which is now threatening our ability to function at all.

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  • FuturePhysicist

    I don’t know if you can blame the quality of the maths. Some have argued though that the financial markets use maths that they themselves don’t really understand such as financial derivatives which may be the only way to practically measure fast moving stock prices, however are left in the hands of “street smart” economists who wish to make a priori guestimates based on narrow microcosms of human behavior at what they do than book smart erodite financiers who wish to make ab initio discoveries and a posteriori judgements to both human reason and irrationality superimposed.

  • thethoughtfulone

    One question I would like to see or hear being asked of our political masters is why this is THEIR problem to sort out using what is ultimately OUR money, no matter what country is involved.

    When questions are asked about high commodity prices, obscene bonuses for bank official, and even more obscene wealth among a few people at the top of the society, they just shrug their shoulders and claim it’s a free market and operates according to “market forces”, what can they do about it.

    So why not just allow this situation to be sorted out by those same “market forces” primarily?

  • Alias

    The problem is not that some banks become insolvent (which is normal in all business models) but that some governments intervene with our money to cover their losses.

    However, almost all of the world’s banks and most of the world’s states are solvent. The problem has more to do with political management than it has to do with banking management.

    The problem of so-called ‘bad banks’ is predominantly an EU problem. 7 out of the 17 eurozone members are now verging on bankruptcy, so that is a failure rate of 41%. However, the vast bulk of the worlds’ other 190 states are doing just fine.

    The EU’s banks are the undercapitalised and overleveraged banks in the world. Contrast Germany with America, for example, where no major US bank has a leverage above 20, whereas no major German bank has a leverage ratio above 50.

    The high leverage ratios of EU banks are the reason that the EU is no terrified of systemic risk and seeks to avert it by forcing its member states to underwrite the losses of insolvent banks and to recapitalise and deleverage overleveraged banks.

    The problem of overleveraged banks is a direct result of EU regulation of the banking sector. EU law via the Capital Requirements Directive allowed EU banks to leverage to insanely high levels in order to support the expansionist monetary policy of the ECB. Since the ECB could not print money to expand the money supply, the next best option in a fundamentally flawed eurosystem was to allow the banks to increase the money supply via cheap credit for which the ECB set the policy rate and overleveraging for which the Commission set the limit.

    It is not a global banking problem, but a regional EU problem. Since EU banks are in the one surosystem, they’re all exposed to each other’s balance sheets. Therefore, contagion is a very serious risk in the fundamentally flawed eurosystem model.

    Given that some non-EU banks lent money to EU banks, they’re now exposed to that bad banking model and to the utter mess that the EU has created by its mismangement of it. So the disease of europhilia now threatens to spread from its regional source and infect other parts of the world.

  • Alias

    Typo: “…no major German bank has a leverage ratio below 50.”