More Emergency Injections for a Dying System

In a statement issued March 13, the European Central Bank confirmed that the financial system is bankrupt and depends on a perennial life-support regime from central banks to survive. Therefore, quantitative easing (QE) will continue once it ends. The statement reads: “The Eurosystem will provide liquidity through a broad mix of instruments, including short-term credit operations (i.e. MROs) and three-month longer-term refinancing operations (LTROs) as well as – at a later stage – structural longer-term credit operations and a structural portfolio of securities….

“New structural longer-term refinancing operations and a structural portfolio of securities will be introduced at a later stage, once the Eurosystem balance sheet begins to grow durably again, taking into account legacy bond holdings. These operations will make a substantial contribution to covering the banking sector’s structural liquidity needs arising from autonomous factors and minimum reserve requirements.”

Dropping the bank jargon, the ECB is assuring troubled banks that the ECB will always provide emergency liquidity, reflecting a situation on financial markets that can be described, with an understatement, as „highly fragile“.

Turning to the New York Community Bank, a “Credit Suisse Solution” was implemented on March 7 for the New York based bank whose stocks had plunged over 70% in one year. An investor group led by former President Trump’s Treasury Secretary Steve Mnuchin’s Liberty Strategic Capital, a private equity firm, announced that it would invest more than $1 billion into the virtually bankrupt bank, to prop it up. Apparently, Mnuchin fully expects the Federal Reserve Board and other U.S. government agencies to backstop the purchase.

All of this solves nothing. As the U.S. banking system invests less and less in the productive economy, and ever more in the speculative economy, NYCB’s situation, even with Mnuchin’s cash, becomes more perilous.

Recall that the famous “Collapse Function” described by Lyndon LaRouche shows an accelerated growth of the overall debt curve, private and government, against an accelerated downward curve of the physical economy. While the 6% collapse of German manufacturing output in January is exemplary of the latter, global debt grew at an alarming rate.

Data released on Feb. 28 by the Institute of International Finance showed that the “everything bubble” of total global debt (excluding financial derivatives) had grown during 2023 by $15 trillion, reaching a total of $313 trillion. Of that growth, U.S. Federal government debt alone accounted for $3 trillion!

In addition, the International Swaps and Derivatives Association estimates at $714.7 trillion the amount of financial derivatives in notional value at the end of June 2023. Even if, theoretically, the notional value is a multiple of the real transaction, the insolvency of a counterparty in the transaction would trigger a global meltdown, given the intertwined nature of the system, where everybody is creditor and debtor of everybody else.

That is why measures adopted by financial authorities, such as the increase of capital buffers, won’t avoid a systemic crisis. Only a Glass-Steagall type of banking separation between commercial banks and investment banks, together with the cancellation of most derivatives deals could prevent a meltdown of the system.