The biggest news out today were the late day rumors of some sort of Euro lending facility similar to what the US government enacted in 2008 during the financial crisis.  These programs helped shore up the banking system and provided the banks with loans needed to avoid mass insolvencies.  It now looks like Europe is leaning in the same direction.   Unfortunately, it looks to me like they’re making a mistake that is quite similar to the one that the USA made when they diagnosed the problem as a banking crisis.

A Euro TALF will help to ease the strains in the Eurozone banking system, but it will not come close to resolving the root cause of the Eurozone’s problems.  This is just another instance of bankers ensuring that other bankers don’t have to take haircuts.  Meanwhile, Rome will literally continue to burn.  The turmoil in the banking system is a symptom of the sovereign problem.  What Europe really needs is a resolution to the flaws of the single currency system.  Some form of capital infusion to the sovereign is an example.  This can be partially achieved via ineffective ECB bond buying, but will, in my opinion, ultimately require a bazooka via direct capital infusions to the nations themselves through some form of fiscal union, Eurobond or Euro TARP that fills budget gaps.  The alternative is default, defection and (partial?) dissolution of the EMU.  I don’t think we’re headed in that direction (although some sort of haircut can’t be ruled out for some periphery nations – I tend to think haircuts would be backed by some sort of bazooka effect so as to mitigate the negative impact).  So, the logical progression is towards fiscal union of some sort and the resolution of the inherent flaw in the currency union.  Tonight’s rumors don’t necessarily bode well for that and that leads me to believe the EMU leadership is either in denial of their problems or refuse to confront them.  It’s easier to just shore up the banks and attach a few band-aids….

A TALF program will help ease banking problems and in that regard it is bullish for EMU banks and bankers.  But in the long-run it does not help to resolve the root cause of the problem which exists at the highest level of the structure of the actual monetary system itself.

So, it’s shades of 2008 all over again (minus the massive capital infusions to the banks and the Recovery Act).  Wall Street gets the bailout, Main Street gets the shaft….Periphery nations can cheer the continued solvency of the EMU’s banking system.   Meanwhile, they get to wallow in the continued misery of the austerity that will continue to accompany this disaster.   The moral code behind debt and humanity has officially become a joke as the wealthy bankers of the world continually spit in the faces of the rest of us….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Smith

    The key question is

    Will the market rally off this news and how sustianable would a rally be?

  • Cullen Roche

    It should rally. This ease the fears of a mass banking panic. But it doesn’t actually fix the EMU….

  • Cullen Roche

    It would require the people in the periphery nations to actually understand what is happening here. Do they? I doubt it….

  • Cullen Roche

    And yes, I am pretty mad that of all the things we appear to have “learned” from 2008 was that it was a mistake to let banks fail. Ha.

  • Trixie

    Ok, now you are scaring me. What sort of timeframe are we looking at here? When the band-aids are no longer effective and the EU needs to come to terms with its future? This is important information since I am about to hole myself up in the crawl space and read Sylvia Plath novels until someone tells me it ok to come out.

  • Wantingtoretire

    I’m in need of an answer to Trixie’s question. What sort of time frame do you think we are looking at before band aids are not going to work for Europe?

  • Roger Ingalls

    Cullen, isn’t the euro (and the ECB by extension) merely an invention of bankers? It has no army, no taxing authority, no direct elections.

    Sounds a bit like Goldman Sachs. Except GS can seemingly tap into WA DC anytime it needs to. Uh oh, it looks like the ECB can too.

  • Not an Economist

    Well, if the US experience is any indicator, regardless of the long term success of the “fix”, the market(s) should rally significantly…

  • kim

    No way the EUR was invented by the bankers. Whatever it’s faults, it reduced the costs of financial exchanges (buying, selling and hedging currencies), and losing the various interest rate carry trades that existed at that time, and were so amazingly profitable.

    Bankers lost their revenues.

    They were, at the time, very upset about the loss of revenue and totally in a panic about it. It was all doom, in banker land. The only happy people were in IT.

    Some smart ones may be benefitting now from the chaos. But few, if any, are in that category, and fewer still would have predicted it.

  • Rafael

    Their incentives lie in self preservation rather than dealing with the underlying issue. Once their livelihoods are confirmed and protected, I hope that at that point the authorities will deal with the problems plaguing the global economy.

  • http://none Scott

    While the bankers are deserving of our ire, it is the bondholders who will see the largest windfall. The bankers keep their jobs and their equity stake is much improved. But the real money goes to bondholders who made bad loans and now benefit from the Euro-TALF-put. The taxpayers are left holding the bag – just as they were in the U.S.. It’s a hugely regressive scheme as it transfers wealth from the middle-class to the wealthy lending-class.

    I would think that a TALF-like deal might be a precursor to an orderly default on Greek debt? What do you think, Cullen? The Germans buy some time by okaying the most recent tranche, make plans to fortify the balance sheets of euro banks, then proceed with the default only after TALF is implemented. Everyone knows at this point that the Greek economy is past the point of no return. TALF allows the Eurozone to circle the wagons around the banks.

  • ES

    > “learned” from 2008 was that it was a mistake to let banks fail.

    Yes, that is exactly it. Today ther is an article on CNBC about how bears should be careful because “we leanred from Lehman”. How can anyone talk about “free markets” and “capitalism” as if they currently exist is beyond me.

  • casanova

    Culllen does not understand European matters. Actually very few Amercians understand Europe.
    The same goes for europeans vis a vis american matters.
    Things in Europe will linger much longer than anyone expects. Greece will not default this year, nor the next.
    Not that the core Europe cares about Greece, but people dont understand that Greece has a stronger negotiating position than Germany and France.
    Greece will not default in the next two years.
    I say the one year Greek bond at 130% is a great investment for the courageous investor.
    Make sure you buy the bonds issued under British law.

  • Cullen Roche

    Come on. You’ve been telling us to buy Greek bonds since they were yielding 20%…..If you were running a fund right now you’d have zero investors left….you’re a top 10 pragcap troll. Keep it up. I’m on the hunt for you guys now.

  • Baychev AKA “Censorship”

    Funny how Thoma, Austrian gold buggers and I’d venture even Krugman think MMT and your ilk are trolls. Be the change you want to see Cullen. It all starts with you.

  • N

    Let me understand about how the Eurobonds are a solution. Europe got in its current predicament because the Euro allowed countries like Greece to borrow at German-like rates and this is how these countries piled on huge debts spent on mostly unproductive activities. In order to help these countries they are going to do what: create a Eurobond that will “allow countries like Greece to borrow at German-like rates and…” Nobody sees a problem with this logic?

  • casanova

    I recommended buying the 2 year Greek bond when the yield was around 40% and also 60%.
    I still think is a good buy. Check your archives.
    I also bought the one year at 139% yield recently.
    I don’t consider myself to be right all the time, as long as I am more often right than wrong, I make money. At least I make precise and verifiable investment calls.
    Why don’t you make a precise investment call and let the time and bloggers here judge how well you do instead of your meaningless general investment ideas?
    Too scared to be wrong?

  • MarkS


    Bob Murphy recently wrote a post claiming that he never predicted hyperinflation. But he’s a bold and bald faced liar. See my comment from his site which he won’t approve:

    Hey Bob and everyone else,

    I think it’s funny how you claim to have never predicted hyperinflation. Yet, in two separate articles in 2009/2010 you clearly did. The first was titled “Will the Fed’s new tools avert hyperinflation?” In that piece you said:

    “How does this avert the threat of hyperinflation? Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. ”

    Then, in 2010 you wrote a piece asking if those dreaded excess reserves (which would cause the hyperinflation as per your 2009 article) were leaking out:
    “Now here’s the really interesting thing: Excess reserves fell about $41 billion in March. I don’t have the time to check all the possibilities, but it looks to me that my doomsday scenario is starting to play out.”

    That doomsday scenario is hyperinflation as your first article EXPLICITLY states.
    So, at least we have you on the record as having predicted hyperinflation – contrary to your repeated lies about having done so. Unfortunately, you don’t know how a modern banking system works and that banks don’t lend reserves so you’ll continue to look like a fool as your hyperinflation prediction doesn’t come true.

  • Cullen Roche

    I’ve made hundreds of calls here in real-time over the last few years. But unlike you, they’re done with a name and a face attached to them. You’re just a common internet troll who spends his time here reading the articles that you like and berating the various authors of the ones you don’t like. You serve no real purpose on pragcap other than to satisfy your own personal needs of trying to bring other people down to your level by denigrating them.

    Keep it up. You’ve placed a nice big bulls eye on your forehead for every other pragcap reader to pinpoint now.

  • AWF

    Yes it does “smell” like the Germans are covering there arse

    I just wish they would not use the us dollar in such a fashion

  • Cullen Roche

    Ah, that’s motivational. If only I could be more like the gold buggers and Mark Thoma. One can only dream!!!

  • Cullen Roche

    Btw, I left 1 comment at Thoma’s site (an incredibly generous comment I should add) and he censored it. You’d love him.

  • MarkS

    It matters because if MMT is ever going to go mainstream you guys need to crush your opponents.

    Here’s the links:

    Thanks for your work here.

  • Cullen Roche

    It’s not my job to “crush” our opponents. You don’t win people over by making other people look bad. You win people over by being right. I’ll let the readers decide who has been right and who has been wrong. Thus far, I don’t think we have many competitors.

  • JWG

    Geithner and Bernanke will download their “solutions” for the US crisis to the EU and the ECB. They have their attention (and will get Merkel’s). The ECB will use its balance sheet in a big way; the EFSF will be deployed in its current form; the Fed will use its swap lines for an indirect bailout; the ECB will keep liquidity flowing to the EU banks and acronymic facilites will proliferate; the IMF will pitch in; and the fundamental economic rot and moral hazard will be papered over, just as in Japan and the USA. Capitalism without losses for the TBTFs, crony capitalists and Wall Street, and a slow decline for Main Street, the middle class and the real economy, with expanding transfer payments as the drug of choice to dull the pain, are the new G7 economic model. If this rot is not emphatically rejected in the next election, the die is cast for the USA.

  • Cullen Roche

    Well, the obvious first step (which would literally solve this crisis once and for all) is E-bonds. From there they’d need to fill in the mechanical, tax and political holes. It would take a long time to negotiate all of that out. I can’t really predict how long it takes lawyers to argue amongst one another.

  • Blankfiend
  • Michael McGillicutty

    Geitner is attending their meetings now….it’s a ‘landmark event.’

    As soon as I heard that I heard the sound of a can being kicked and lightened up on my short bias….

    Cullen is right, if they are taking advice from the Fed, one has to assume that advice was the sort that has ended them up in the same spot they were last year having to contemplate QE3. Not a solution, but absolutely a ‘stimulus.’

    At least until the next crisis….such as Obama’s bill not being passed and a re visit of the debt ceiling type fears – but this time with unemployment, the middle east blowing up again, or whatever else will cause us to bounce off 1250ish.

  • stpepper

    Take into consideration this is just a proposal. Whether this ends up being passed by 17 legislations without a hitch it’s another matter altogether. I can imagine there’d be some resistance from ‘the common people’ to doing a TALF program.

    Another hitch would be that even if they manage to get this Euro TALF through, more Euro countries (I’m looking at you France) become the victims of the wolfpack, making the situation very serious, even with the TALF(Especially considering France is a very big contributor of funds).

    Please correct me if I’m wrong, but isn’t using the EFSF funds to ring fence the banks rather pretty much throwing the PIIGS under bus?

  • Albatross

    This has a critical flaw – unlike TALF in 2008 which calmed a panicking market – EuroTALF will turn the ECB into a bad bank. In 2008 – many reasonable people would have bet that some ABS were being “mispriced” by a panicky market – TALF allowed these people to take a bet with a taxpayer funded put-option. Nevertheless, the buyer of the asset still had to take the first hit – the haircut before TALF kicked in.

    What is the haircut going to be? If the program is non-recourse and with minimal haircuts (unlikely given German nervousness), then ECB risks becoming the holder of bad debts. Alternatively, if the program is recourse or with substantial haircuts, then who participates?

    I’m not sure EuroTALF gets off the ground – or if it does – that it is structured to actually be used by market participants.

  • Kostas Kalevras

    Legislation did not require any risk weight on Euro area government debt. By definition German and periphery bonds were considered zero risk. I don’t really understand why buyers of the debt are now considered to have made a bad investment choice and should loose money.

  • jrbarch

    Hi Cullen,

    Was thinking about how nature favours diversity and wondering why Europeans want a single currency in the first place? Adding infinity-1 to infinity-1 doesn’t mean that much if all countries understood their national (fiat) currency. Wouldn’t it be better to celebrate differences in culture and learn to live and trade together??? Why do they need political union or a currency union – (maybe they aren’t happy with who they are)?? I don’t get it ….?

  • Cullen Roche

    They could go back to individual currencies, but I think their proximity and interdependence is like a black hole sucking them closer together for a multitude of natural reasons….trade being the primary one….It’s the natural economic progression. Or so it seems to me….some will fight it, but i’ll see a unified Europe in my lifetime….

  • jrbarch

    OK. Thanks Cullen. So if trade is the gravity pulling these Nations together, how come floating national currencies is not a workable solution ??

  • ES

    Europeans don’t pretend being capitalist, so they never really were opposed to bailouts and subsidizing of their companies. The problems start when bailouts have to cross the country lines because then national issues kick in, due to the lack of fiscal union.
    On top of it, europeans experinced many monetray shocks in the 20th century, which USA was spared. Therefore, they are much more wary of using their balance sheet.
    Ironically, the only thing that can get them moving in the direction of cross-country bailouts is the fear of another monetary shock, which is currently happening. But I am pretty sure they will not go big bang with bailouts due to the all-overriding fear of inflation.
    Europeans are really not that good at kicking the can down the road because over the thousands years of history they learned the consequences of it will enough, but the USA hasn’t.
    So, I am personally not very optimistic about this TALF thing working.

  • quark

    Why is it that the first, second, third…reaction to a financial crisis is focused on saving our assessing withot consideration of a long term fix that builds for the future. What occured in 2008 and now is occuring via fed policy in offering up my/our citizens wealth to foreign entities effectively removes free will and choice from each of us. It is reckless and border on treason and I submit that those who support such an action are treaonous as well.

  • Cullen Roche

    They worked fine, but there are enormous synergies in a single currency here. Like the USA. It makes sense to have a common currency, but only if they complete the union….

  • Jack

    Hi Cullen, I’m an Italian undergraduate student of Finance. I often read your site and i like it very much, and one of the reasons is that your way of thinking seems to me very ethic.
    I like finance as a subject to study, because it’s very deep and interesting, but i hate the speculative and bad (sometimes illegal)behaviour of some big banks and other players in the market.
    Given your big experience, would you suggest to someone to enter in the business of finance?
    I’m sorry for my English, and i’d be glad if you’d give me a reply

  • stpepper
  • Colin, S.Toe


    Stick to Danielle Steele (I think Bell Jar was the only one, anyway).

    Your sense of humor is needed for more than your own survival.

  • El Viejo

    In the early to middle 80’s My mom’s and my broker at Merrill Lynch called each of us and tried to get us to move out of our stocks and into something else. Mom told him to fly a kite. I had told him in the past never to call me at work as I was too busy to think about investing, but he did anyway and I capitulated(word of the day) and said ok to his recommendation of some unknown(by me) oil company. Two weeks later said oil company went belly up. A short while later they were picketing ML offices in my Mom’s home town. Later the broker called to tell my mom that he had left ML. I think we know why you left. You’re a good guy Charlie Brown.

  • Cullen Roche

    I am not saying that the employees at these firms aren’t good people. But for the most part, they’re sales people. So they’re given a sales pitch and they sell it. They’re mostly good people and generally good at what they do. But that doesn’t mean that Mother Merrill is necessarily leading them down the path with the right plan in hand. That was my problem. I didn’t agree with the business model.

    Finance is filled with misconceptions. I like to think that I’ve got a better grasp on things than most other people because of my past experiences. But again, I am sure I probably just sound like a pompous jerk to a lot of people. Am I right? I don’t know. I am just working from experience and personal belief. I probably sound like a pompous ass to a lot of people out there who work in the industry….Sorry.

  • Trixie

    “I think Bell Jar was the only one, anyway”.

    Yep, yep. I figured referencing Sylvia Plath would go relatively unnoticed and that I’d be pushing it if I mentioned ‘poetry’. This is me on good behavior.

    Good catch, Colin. :)

  • Nils

    If we had an EU TARP in the original crisis instead of the national versions on which Mrs. Merkel insisted a lot of the countries wouldn’t be in the mess they are now. And they could just have let Greece default or haircut to a sustainable level, recapitalize French and German banks and be done with it. Wouldn’t change the fundamental flaws in the EMU (Trade imbalances have to be adressed!) but we could have kicked the can a few years. I think in the next 2 months the defecation will hit the ventilation, I have no confidence in EU politicians coming up with a workable plan.

  • dimm

    How one can buy Greek bonds issued under British law ?

  • kim


    If you find finance interesting, why not ? I worked in the business for 20 years, and while it had its low spots, it was on the whole immensely fun. I had the chance to live in Japan for 10 years, made many very very good friends, was relatively successful, and never ever did anything that I consider unethical. I was sometimes asked to, and I was sufficiently valuable as an employee to be able to say no.

    But you will have to decide which type of finance to pursue. Working at an investment bank these days is I think rather nasty (big organisations, big politics, so requires a thick skin, and unlike in my days, you specialise so much that there’s less intellectual fulfilment). You’d meet some great people and some real scumbags !

  • Colin, S.Toe


    Don’t apologize.

    I’m not the only one who finds what’s happening truly scary. And not only do you help us understand it, but you, Trixie, VII and others on this site do more to keep my spirits up than anything else lately.

    The ‘straight man’ role is the key.

  • Larry

    Is the newly elected Danish prime minister a secret MMT’er? It seems like she ran and won on a platform similar to what Cullen might propose (correct me if I’m wrong about this). I know the allocation of increased gov’t spending is what is most important to TPC and MMT’ers. See this: “With all votes counted, the bloc led by Social Democrat leader Helle Thorning-Schmidt had won a narrow majority in parliament.
    She is set to become Denmark’s first woman prime minister. Incumbent Lars Lokke Rasmussen has admitted defeat. Ms Thorning-Schmidt campaigned on a platform of tax rises and increased public spending.

  • Malmo

    Good stuff from Ed Harrison (mentions you, Cullen):

  • kim


    Because they were wrong ? They sought to earn a higher return, with no increase in risk – ie hoped that their was a free lunch. Just because the regulation of banks suggested that the risk was zero did not (clearly !) prove this was true.

    Investors have to make their own minds up, and when they are wrong, take the consequences. Since many are not professionals, and rely upon the wise words of others, this is clearly a difficult proposition.

  • jrbarch

    Thanks again Cullen! Is there an article you (or others) know of that explains how single currency synergies can operate to improve on floating currency exchange – and how it can be made systemically feasible among European nations, cultures and polities? Am doing my best to try and comprehend this stuff??.

    My understanding currently is that in a fiat monetary system:
    1) Fiscal policy only works effectively under MMT principles
    2) The degree of cooperation and understanding required to implement fiscal policy effectively is not available in any single country on the planet; which makes it a huge ask for a faltering cooperative.

    Have you written anywhere why you think there is a chance Europe could complete the union and make it work? The USA seems to me to be like one big family living under the same roof. In Europe there are many families and just the idea of a roof! Am trying to work out which option would be better and why: undo something that was impossible in the first place or improve upon the design, even incrementally??

    Systemically, working from the solution back to the present state: how would it, how could it work?? That’s what I don’t get …. any recommended reading would be much appreciated.

  • Jack

    Yes i do like Finance, but sometimes i think that what you have to study every day is the behaviour of irrational and bad speculators, bad politicians and how their behaviour influences the other players in the market. You study an inherently flawed market. I mean, if you are a physician, you can be assigned to a research that tries to identify when the magnetic poles will switch their positions. if you are a biologist you can reasearch on the behaviour of the brain. Evevn if you won’t discover anything new in these fields in all your whole life, these are objectives that i think can stimulate you continuously, because they’re direct to the improvement of the human knowledge, and they could bring a real benefit to the society. I think that a lot of people would be glad to work with these ambitions. Furthermore, the brain is tangible, the poles are tangible, they exist in nature from the beginning. Finance is a sovrastructure(even if necessary).
    My question is, how can i be sure that i will like to study for a life about a flawed and (sometimes) bad market?
    Again, sorry for My English and also sorry if my thoughts could look ingenuous or if they contain misconceptions. Please, feel free to tell me if you find some of them.
    Cullen, i think that without an attitude of self – confidence on your opinions(that i don’t judge excessive), you wouldn’t have created this blog, and that would be a pity!

  • Andrew P

    I don’t see how they execute an unconstitutional transfer of executive authority to a Federal body without some kind of serious military support. Their voters at home won’t like it, and elections are coming up in France and other EU states. It requires a “coup” to establish a Federal fiscal authority without changing the treaties or voting on a new constitution. I’m not saying that it can’t happen, and I have speculated myself about a transition to an EU dictatorship during an emergency, but this is a much bigger deal than issuing some routine declaration from the European Commission or creating the still stalled EFSF. They have to line up support from their Generals and police commanders in secret before going live with a plan like this. The biggest obstacle is that the EU does not have a military command structure. That is still with the individual States.

    They probably have a very limited time to do it as well. The weakest links in the EU are the political systems of the individual States. The election of a radical government that will pull out of the EU becomes increasingly likely as conditions worsen. And if a State pulled out, would the other States commit military forces to occupy the rouge secessionist State?

  • Martin


    There are some greedy people, they are some stupid people, and they are also some stupid greedy people.
    There is no free-lunch when you buy risky debt.

    Same thing apply for buyers of Irish subordinated bank debt, investors should have known that Subordinated bonds pay higher yields than senior debt to reflect the fact that they are more likely to take losses if the issuer gets into difficulties. So why bailing out stupid investors?

    Perception of credit worthiness is all about implicit guarantees from governments.
    Investors believing in implicit guarantees and AAA ratings should spend more time doing there homework assessing risk.