Spain’s banks are in a world of trouble, as you’ve undoubtedly heard. They are strained by loans made over the course of a a building boom that went bust in 2008, two recessions in the last three years, and the highest unemployment rate among developed nations. Misguided austerity policies have only made things worse. Everybody is biting their fingernails, trying to figure out if the bailout Brussels recently concocted will work. Stocks are reacting in an up and down roller-coaster ride. Depositors are taking their money out of banks in the most vulnerable countries. The biggest fear is that if the bailout fails, the contagion will spread even further into Europe’s core and eventually to the shores of the US itself.
That fear is justified.The 100 billion euro proposed recapitalization for Spanish banks is not a small number. It would be like a $1.6 trillion capital injection into the U.S. banks if it was projected onto the scale of the U.S. economy. That is greater than everything that was done by the Fed and the Treasury to shore up the capital of U.S. financial institutions during the Great Crisis. Nonetheless, I judge that compared to the size of Spain’s non-financial private debt and the size of its bank run, this is a mere bandaid. And remember, even during the darkest days of the Great Recession of 2008/’09, the U.S. did not have a bank run.