While the nation is burning to the ground the media seems more concerned with John Edwards, a washed up corrupt politician, mistrial. Here at STR I will do my best to try to keep your informed as to what is going on.
The article below should be whats in the headlines right now not Edwards. Banks are loading up with debt which is going to lead to an even bigger crisis. What is being suggested here is instead of the Fed directly buying monetizing government debt, banks are being forced to do it?!?!
I don’t know maybe I’m wrong but that sounds like money laundering 101 to me.
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Time Bomb? Banks Pressured to Buy Government Debt
By: Jeff Cox | CNBC
US and European regulators are essentially forcing banks to buy up their own government’s debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country’s debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
“Captive bank demand can buy time and can help keep domestic yields low,” Lorenzen wrote in an analysis for clients. “However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn’t used very prudently.”
“Specifically,” Lorenzen adds, “having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations.”
The banks, though, are caught in a “great repression” trap from which they cannot escape.
“When subjected to the mix of carrot and stick by policymakers…then everything else equal, we believe banks will keep buying,” Lorenzen said.
Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt for years, he found.
Spanish banks bought 90 billion euros worth while Italian firms picked up 86 billion euros just between November and March. Even in the UK, which has avoided a debt crisis as it is outside the euro zone and able to set its own monetary policy, banks have increased holdings of gilts by 100 billion pounds over the past few years.
And in the U.S., banks, though having “comparatively low holdings” of Treasurys, have bought $700 billion of American debt since 2008.
“Ask the simple question: Why are banks buying sovereign debt when yields are either near record lows, or perhaps more interestingly, when foreign investors are pulling out?” Lorenzen wrote.
He thinks he has the answer.
For one, the European Central Bank’s Long-Term Refinance Operations provided guarantees for the debt, which Lorenzen deems a “heavily sweetened form of financial repression given the pressure banks were under” to buy.
“Banks have ended up buying bonds at yields where they would happily have sold them only a few months prior,” he said.
Moreover, banks are allowed to not count the sovereign debt against their Basel capital requirements. Also, Lorenzen argued, European banks have escaped the onus of stress tests this year, a less-than-subtle hint that authorities are willing to tolerate a bit of looseness in banks so long as they are helping to stave off a full-blown debt crisis. ….Read More