Albert Edwards: Spain's Bailout Solves Nothing

Going through Japan's lost decade with Peter Tasker was a prequel to our current plight. One of the key differences he had with consensus was on the banks. Consensus believed Japanese banks were at the apex of Japan's economic woes and the main problem. Hence bank recapitalization was seen as the key to turning the economy around.

Peter's view was that although the banking sector was indeed damaging the economy via a credit crunch, the banks were not the problem but a symptom of the problem: the true problem was deflation and the lack of stimulative policies. ...And so it is in the eurozone. The Spanish banking sector is a victim of deflationary policies enacted at the behest of German economic orthodoxy. A bailout will solve nothing.

...Spanish banks need recapitalisation because of the deflationary policies forced on them to reduce Spain's public sector deficit at a time when the private sector is also de-leveraging. Clearly this has a lot further to go and house prices will fall even further as a result.