Phase I is interest rate supression, Phase II is currency and capital controls.
As Reinhart and Kirkegaard wrote in their March 2012 VoxEU Op-ed:
Financial repression: Then and now
...As coined by Ronald McKinnon (1973), the term “financial repression” describes various policies that allow governments to “capture” and “under-pay” domestic savers. Such policies include forced lending to governments by pension funds and other domestic financial institutions, interest-rate caps, capital controls, and many more. Governments have typically used a mixture of these to bring down debt levels, but inflation and financial repression typically only work for domestically held debt (the Eurozone is a special hybrid case). In the current policy discussion, financial repression comes under the “macroprudential regulation” rubric....MOREFrom ZeroHedge:
It takes all of three seconds on the ground in Spain to realize that this country is hurting. Big time.Is the red ink too, as the Hollywood folks say, on the nose?
I was just here three months ago, eight or nine months before that. Each time it seems worse– more strikes, more homeless, more unemployed, more unrest, more storefront vacancies. It’s amazing what the combination of debt, deceit, and a bona fide banking collapse can do to a nation.
In a most intellectually disingenuous statement, European leaders recently announced that Spain is A-OK and would not require a bailout. I suppose it’s true to a degree. Spain doesn’t really need a bailout. More like an exorcism. Or at least last rites.
After all the debt, austerity, government collapse, riots, etc., there’s a new crisis du jour here: the banking system. Individuals, businesses, and institutions are all predicting a breakup of the eurozone, and nobody wants to have cash in this country on the day they introduce a new currency (and then immediately proceed to devalue it.)
Consequently, depositors are moving money out of the country en masse, often to the tiny principality of Andorra next door– a highly capitalized, low tax banking jurisdiction. This leaves the already thinly-capitalized Spanish banks in an even weaker position.
As you probably know, the way the banking system works in most of the world is a complete fraud. Most banks only hold a tiny percentage of their customers’ deposits in cash. The rest is ‘invested’ (gambled) or loaned to a bankrupt government.
This is a high-risk model that only works well when people have tremendous confidence in the system. The moment there are more than a handful of depositors wanting their money back, the bank has a big problem.
This is happening nationwide in Spain, so the entire banking system has a problem. Nearly every bank here is technically insolvent… and yet they have droves of customers trying to withdraw funds that aren’t there.
As such, the IMF is now recommending that Spain (and other nations in the eurozone periphery) take action “at the national level” to stem this flight of funds and prevent people from moving money abroad....MORE
Previously:
Allianz on Repression: "Welcome to a RIGGED Future in a World of Financial Repression "And from the big daddy of recent research, Carmen M. Reinhart and M. Belen Sbrancia's "THE LIQUIDATION OF GOVERNMENT DEBT":
Rothschild Wealth Management: "Investing in an era of financial repression"
Rabobank on Financial Repression and What Bernanke is Up To
IMF: "The Good, the Bad and the Ugly: 100 Years of Dealing with Public Debt Overhangs" (Policy Responses to Debt/GDP Over 100%)
"Investing When Fundementals Don't Matter"
...The pillars of “Financial Repression
The term financial repression was introduced in the literature by the works of
Shaw (1973) and Ronald McKinnon (1973). Subsequently, the term became a way of
describing emerging market financial systems prior to the widespread financial
liberalization that began in the 1980 (see Agenor and Montiel, 2008, for an excellent
discussion of the role of inflation and Giovannini and de Melo, 1993 and Easterly, 1989
for country-specific estimates). However, as we document in this paper, financial
repression was also the norm for advanced economies during the post World War II
and in varying degrees up through the 1980s. We describe here some of its main
features.
(i) Explicit or indirect caps or ceilings on interest rates, particularly (but not
exclusively) those on government debts. These interest rate ceilings could be effected
through various means including: (a) explicit government regulation (for instance,
Regulation Q in the United States prohibited banks from paying interest on demand
deposits and capped interest rates on saving deposits). (b) In many cases ceilings on
banks’ lending rates were a direct subsidy to the government in cases where the
government borrowed directly from the banks (via loans rather than securitized debt);
(c) the interest rate cap could be in the context of fixed coupon rate nonmarketable
debt; (d) or it could be maintained through central bank interest rate targets (often at the
directive of the Treasury or Ministry of Finance when central bank independence was
limited or nonexistent). Metzler’s (2003) monumental history of the Federal Reserve
(Volume I) documents the US experience in this regard; Cukierman’s (1992) classic on
central bank independence provides a broader international context.
(ii) Creation and maintenance of a captive domestic audience that facilitated
directed credit to the government. This was achieved through multiple layers of
regulations from very blunt to more subtle measures. (a) Capital account restrictions
and exchange controls orchestrated a “forced home bias” in the portfolio of financial
institutions and individuals under the Bretton Woods arrangements. (b) High reserve
requirements (usually non-remunerated) as a tax levy on banks (see Brock, 1989, for an
insightful international comparison). (c) Among more subtle measures, “prudential”
regulatory measures requiring that institutions (almost exclusively domestic ones) hold
government debts in their portfolios (pension funds have historically been a primary
target); and (d) transaction taxes on equities (see Campbell and Froot, 1994) also act to
direct investors toward government (and other) types of debt instruments. (e)
prohibitions on gold transactions.
(iii) Other common measures associated with financial repression aside from
the ones discussed above are, direct ownership (China or India) of banks or extensive
management of banks and other financial institutions (i.e. Japan). Restrictions of entry
to the financial industry and directing credit to certain industries are also features of
repressed financial markets (see Beim and Calomiris, 2000)....
Page 8 of 66 (PDF) with many specific examples beginning on page 16.
