Monday, August 24, 2015

The financial crises

There is a strong, albeit also a weak link, in the international financial system. It is called the "creditor of last resort". This creditor is the one who ultimately pays for all the follies. Because follies, that is what all crisis are.

When a private bank becomes insolvent there is a national central bank that injects money. But this creditor is not of last resort.

When the national bank runs out of cash there are always supra-national banking systems (ECB, WB, IMF) that lend money to plug the holes in the balance sheet. But these are not creditors of last resort either.

When the supra-national loans have to be paid, then the national banks, through their respective governments, activate their "creditors of last resort". And these are the tax-payers who have no option but to pay up.

For as long as the tax-payers continue being the "defenseless creditors of last resort" there will be no end to this charade called... call it whatever you want to call it... but typically this charade it is pompously called the international financial system.

All this is nothing but a generalized practice of "moral hazard" throughout the financial industry. None of the players can claim immunity.

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