Austrian business cycle theory explains that the “bust” phase of that cycle is created by extension of the cheap and plentiful credit by a fractional reserve banking (FRB) system. A FRB system is inherently fragile during the bust phase as its leverage (lending as a percentage of its own capital) exposes the banks to the emerging tsunami of non-performing loans and impaired collateral that are the manifestations of mal-investment.
Yet, in today’s protected and regulated banking industry, the “bust” phase of the cycle is delayed and distorted by the wide-ranging interventionism of regulators, central banks, and governments. The ongoing crisis in the European banking sector is evidence of this. Its problems of insolvency are unresolved. The ECB is at the center of interventionist efforts to stall and mitigate a European banking sector collapse that looks increasingly likely within the next 18 months…… The political process is to determine how Eurozone governments proceed and attempt to manage the twin crises of growing sovereign debts and growing systemic insolvency risk in the banking sector.
The latest event in that process is the German Constitutional Court’s ruling last week that it does not agree that the ECB has been acting within its mandate when conducting debt monetization, although it did not explicitly rule that the ECB broke the German Constitution…….To Read More….