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CONTRIBUTION · 25th August 2011
Alexander Pietralla
Far from being the classic “risk management tool”, government bonds today are beginning to look like toxic assets. And bailing out the governments issuing these bonds is tantamount to bailing out the banks… yet again. So hypothesises INSEAD Finance Professor Theo Vermaelen…

European taxpayers are asked to bail out Greece and other southern European countries to avoid a financial meltdown.

The logic is that most Greek and other government debt are held by banks, so if we let these countries default the banks will default, so we are back to November 2008.

So we are really asked to bail out banks, but given that banks are hated so much we are told that we are saving the Club Med countries and the European Monetary Union.

However, the recent collapse in European bank stocks suggests that markets increasingly believe that German, Dutch and Finnish voters won’t agree to this second bank bailout in three years.

Read the entire Article HERE.

By reading the pretty good article attached above, one central question comes screaming at one:

'Why do banks buy assets like government bonds and why do governments force their banks, by regulations, to buy them ?'

Since the invention of the computer and global communication networks banks do not have any business model left (Basel 1, 2, 3, ... n just prove that they do no even understand their core business).

Regulations are in place to keep an old fashioned and redundant business (Banking) in place and the only reason the banking system as of today is kept alive is because banks buy government bonds. Who else should be so stupid?

It is a political sceneplay not a business need.

Banks could be completely replaced by peer to peer lending and some highly sophisticated financial advisory boutiques. But politics need them to get their debts sold. There is a multitude of different ways that could be discussed, and will be necessary, to find a way out of the mess we are in. Alas, are we developed enough to keep the discussion around them human ?

In the past the creditor was often killed, to avoid repayment - is chaos avoidable ?