All together now...collapse!

Spain and for that matter the euroland looks to have learned nothing from the 2008 financial crisis or past panics.
The only way to tackle a collapsing banking system is to use overwhelming force, however costly it may be.
Had not Ben Bernanke and Hank Paulson been utterly ruthless in the dying days of the Bush administration, trampling over all and sundry after Lehman was forced to the wall, the U.S. would not be growing now.


Similarly, swift action by Alistair Darling and (with a bit of prodding) Sir Mervyn King in the same period saved the UK from meltdown.
The difficulty in Britain has been that because the financial sector is so uncomfortably large, 500 per cent of national output, even the £1trillion thrown at the financial system has not proved enough to keep credit flowing.


The consensus has been that Greece is the source of all euroland’s problems and if an elegant return to the drachma could be engineered then all would be well. That assumes that the rest of the euro area’s banking system is sound, which it clearly is not.
Spain’s banking system is a basket case, weighed down by housing and commercial property debt. The authorities behave as if they are in denial.
Instead of facing up directly to the problems of Bankia, in the same way as the UK confronted the Royal Bank of Scotland’s difficulties, Madrid has been continually looking to duck the toughest decisions.
Reassurance that Bankia and the rest of the Spanish banking system is secure can only happen if the Madrid government were to go directly to the European firewall – the European Financial Stability Fund/the European Stability Mechanism – and persuade them to inject capital directly into Bankia and other inadequately capitalised banks. After all, this is what the International Monetary Fund believes is the right course.
The difficulty is that the firewall, at an estimated 800billion euros, is far too small. If Spain’s banks are to be recapitalised it would make sense for the Italian and some of the French banks to receive capital injections too. That would require a firewall of at least 2trillion euros, something that has been obvious for a year at least.


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