Was this article helpful?00ByJohn S Hopkins Jr
European banks recently took advantage of a program from the European Central Bank meant to increase liquidity in Europe's fragile banking system. The banks borrowed almost 500 billion euros in 3 year loans carrying an interest rate in the range of 1%.
The market's initial reaction was positive but then it started dawning on traders that the need for such a huge amount of cash could signal more trouble. There's also some question as to how the funds will actually be used; i.e., will the funds be used to loan to third parties or will the banks just sit on the cash, or invest in treasuries while enjoying the spread, much like US banks did when they received TARP assistance back in 2008.
In many ways, what's going on in Europe is eerily similar to what happened in the US during that tumultuous period back in 2008. Regulators saw trouble brewing, and instead of letting more banks go under decided to throw lots of cash at them, which some think ultimately worked. Now European regulators are hoping for the same outcome, though it is too early to tell if what they are doing will work.
Let's remember what happened not long after US banks got their TARP funds. It took a few months, but eventually, the market tanked, with the S&P hitting a low of 666 the week of March 2, 2009. In fact, the S&P was close to 1100 at the beginning of October, 2008, when TARP was initiated, so it fell almost 40% in a five month period.
There's no telling if Europe is on the same path, but those who went through the volatile times at the end of 2008 and the beginning of 2009 know that the initial reaction to TARP was relief. Then reality set in resulting in that big move down in the equity markets. What's the lesson? We shouldn't be surprised to see a similar outcome once the initial relief period wanes.
Whatever the ultimate outcome one thing is clear. Banks have once again managed to hold the universe hostage due to their poor decisions. And, once again, the party line will be that banks are the lifeblood of the economic system, that we can't live without them, that they must all remain strong. Really? Might we not be better off if the we let things run their course, letting the weakest of the weak go under, while weeding out those banks who have made the worst decisions? No one seems to have the answer, but perhaps its worth a try.
About the Author
John S. Hopkins Jr is one of the co-founders of Invested Central. John founded the company in 2004 after spending almost thirty years in the financial services sector. John started out by producing and providing educational training programs for financial institutions and their employees. Hundreds of companies and thousands of employees have used his training materials and John has taken this successful experience and now provides educational training to stock market investors.
You can learn more about John and Invested Central, and sign up for our free stock market newsletter, at http://www.investedcentral.com
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John S Hopkins Jr
Economics Article FeedFind More ArticlesSearchRecent ArticlesHow To Solve The Homeless SituationProgressivism Isn't Progress, VIIIHow Secure Is Your "Secure" Job?A True Comparison Of Increasing Debt Between Bush And Obama AdministrationsHow To Compete With ChinaWould Einstein Think Us Insane?What Will Happen If Greece Defaults?A Cluster of (Minor) ErrorsThe US Recovery Is Producing SurprisesA Sigh Of Relief For The Economic Status Of The USSubmitted On December 22, 2011. Viewed 12 times. Word count: 431.MLA Style Citation:Hopkins, John S.".".22 Dec. 2011EzineArticles.com.26 Jan. 2012
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