That is the take of Dick Bove, analyst from Rochdale Securities. The premise is that "The irony of what’s going on right now is that the banks are benefiting at the moment from what’s going on in Europe,” he said. “The European banks are selling American assets to American banks at discounted prices which is creating a benefit for the American banks.”
He points out that banks are actually flush with cash and there will be no fear over funding issues. Indeed, he argues that they may actually be over capitalized.
“If you take all the numbers going back 75 years to when the FDIC was first created,” he said, “we’ve never had this high a level of capital plus reserves as a percentage of assets in the banking industry, ever.”
"Plus, deposits are pouring in because when people are afraid of what’s happening in the market, they put their money in the bank."
"The banks have too much liquidity right now, too much capital right now,” he said. “There is no funding issue.”
While the stock prices for the banks have been very weak, Bove seems to me to be right. Our problem is not that the banks are illiquid but that they are hoarding.
While I can buy that in the short term the Euro crisis only helps the banks can you really assume that in the long term if there were defaults this won't hit the U.S.?
St. Louis Fed President James Bulliard says no:
"Rather than explode and cause global contagion, the problems countries such as Greece and Italy have repaying their sovereign debt probably will be contained, said Bullard, who believes the Fed has sufficient policies in place to safeguard the American economy
"Obviously Europe is a risk. We don't know what's going to happen," he said. "If it blows up in a big, disorderly way, which is what everybody is worried about, then that could come back to haunt us. If it just kind of tumbles along for a long period — which is the most likely outcome — then I'm not sure you'd get much feedback to the U.S."
Still note that he makes this contingent on Europe "just kind of tumbles along for a long period." He admits that if he did blow up that could come back to haunt us. In a global, interdependent economy like ours today it is really possible that you could have a part of the world-Europe-in long term stagnation with other parts vibrant and dynamic-China, the other emerging economies, Canada, the U.S.?
“The year 2011 ends with a pattern of diverging growth among major economies, and we expect this de-synchronization to persist in 2012” said Neal Soss, the chief economist at Credit Suisse in New York said in a report on Thursday.
A mild euro zone recession would not, in Soss’ opinion, be enough to drag growth in the rest of the world sharply lower; but he believes a severe downturn, driven by a financial crisis, could “still overwhelm the rest of the world.”
So it seems that the question is one of scale. If Europe "blows up in a big, disorderly way" then it could "overwhelm the rest of the world."
Today it may not have yet overwhelmed the rest of the world but it has overwhelmed the rest of the world's markets as the Dow is now down over 200.