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Euro Re-capitalization in Plain Language

October 3, 2012

The European banks are in trouble, and the problems won’t go away.  Each addition of other-people’s-money simply leaves the underlying cause to resurface at the next juncture.  Here is the short version-

The politicians in failed countries say, “Please give our failed banks more money so they can lend.
The politicians in failed countries mean, “Please pay the guys who gave me money so I can keep getting campaign contributions.”
I hear them, and say, “Screw this.”

The Spanish, Italian and Greek banks should go broke and be dissolved!  The board of directors and stock holders should lose all their money.  Yes, I mean every last penny.  That punishes the bad banks and the bad politicians they supported.  I’m not sure if the depositors should be made whole, or not.  There are good arguments on both sides.  Where can Spaniards put their money once Spanish banks fail?

Outside banks can open new branches in Spain, Italy and Greece.  I know some gently used buildings they can buy at very reasonable prices.  The critical issue is to leave the new banks free from political control.  Spanish control of banks is exactly what failed.  There is no reason to repeat such a profound failure.  Anything but banking freedom is political theater and worse.  Anything else is simply throwing good money after bad banks.  Control by local politicians begs for more political bribery.  Political control perpetuates the original system of bad banking that brought on this crisis.

The US has its own spending addiction to overcome.  We both are running out of time.

Tax revenues are tumbling in Spain.  Now,  one in four Spaniards are officially unemployed but the actual rate is higher.  The Spanish government is reluctant to raise taxes on Spanish companies.  Profits earned outside Spain are taxed in their country of origin, so corporate tax returns in Spain fall along with Spanish employee income.  Adding to Spain’s problem is the hemorrhage of talent as both employees and companies move across the border to countries with a lower tax and regulatory burden.  Fewer workers and fewer companies are left with to pay the ever growing Spanish debt.  The Spanish government has adjusted its budget several times this year as revenues continue to fall.

I’ll bet you the Spanish budget is not yet balanced.  They are simply going broke more slowly.  The Spanish government does not have the resolve to actually shrink the handouts and cut back the promises.  They are not willing to compete with the rest of the world for talent and resources.

I remember reading a story by David Freedman that described a world where moving was easy.  In such a world, everybody left Canada for the winter and they left Florida for the summer.  They left California after five months to avoid California taxes.  Kansas might try to raise taxes, but the state emptied out over the weekend and only government employees were left by Monday morning.. at least those government employees that couldn’t tele-commute.  We are seeing the same effect played out at a slower rate in the United States and in Europe.  It will happen in time.

This is Spain’s future, and California’s future as well.  But France is slightly ahead of us.  The French have imposed 75 percent income tax rates.  Do you think anyone would leave France rather than work for free?  The rich will leave to keep their money and the poor will leave to find jobs.  Could be true.

~_~_

Rob.  Please rate, share and comment.

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