The old French Market, New Orleans
Ilargi: Without having any intention of being sacrilegious, I do feel like his Mother's son at times. As the market rally rallies on through, and Ben Bernanke declares himself the savior of his country and by extension the world (talk about sacrilege!), ever more people start suggesting that we at The Automatic Earth should admit our mistakes in predicting major league financial mayhem. See, that's when I feel like saying, like he did: "Don’t worry, I told you I knew you would do this".
And I don't think it's over yet, the wave of doubters who become believers. With the stock markets on the rise and no serious media resistance to speak of as reaction to Bernanke's clownish utterances, it's inevitable that people would doubt. Many have switched sides, many others will follow. People don't feel comfortable in doubt, if it takes too long they go looking for a crutch, for some kind of support to rest their weary heads on.
But that doesn't mean we have been mistaken about what we have told you. In fact, our message has been crystal clear all along, and events play out just as we’ve been telling you all along. First, the herd must pass over the grass. Any shepherd can tell you that. Only then can be revealed what is left of the pasture. First, the townsmen and women, and don’t let’s leave out the children, will all have to go and follow the circus out of town. Only then, only when the music fades and recedes beyond the distant horizon, can they come to their senses. It's a story as old as mankind, and a billion years older too.
It’s not even an equal or fair issue. People are by nature so hugely biased against the possibility of bad things happening to them, they'll all sign up for the first soothsayer with a story that uses the appropriate words. They’ll choose short-term gratification over the prospect of long-term hardship any time, any day. It matters little to nothing what tomorrow brings, as long as tonight the booze and the music's good enough to make them forget, and to evoke memories of better days.
And the morning after, they'll go look for another smooth voice. If it weren't like that, no-one could ever sell a second-hand car again. Or a good book. Or a detergent or a president. Regardless of the limits the world around us places on us, our hopes and dreams know no limits. That is a beautiful thing, as long as you put it in the right (re:smooth) words.
It also means, however, that we cannot put limits on ourselves, on what we do; maybe as individuals, but not as a species, not as a force of nature. The same need for comfort and redemption that makes us follow the circus, is the one that makes us penetrate ever deeper into the few corners of the world we haven't seen yet, and drag out of those corners what could make us belive that the clown, Bernanke, is our savior.
We can't help it, it’s what we are. There are exactly zero species on the planet that have been outfitted with an inbuilt limiter, and we are no exception. We will continue until the planet, the system, whatever you want to call it, imposes such limits on us. There has never been a need for nature to make species stop themselves, it's the one fatal trait that would destroy the driving force behind evolution.
And if you don't yet understand the connection between what makes you buy cars and trinkets and presidents on the one hand, and what makes you believe in revering green shoots on the other, plus what makes you drive your car and eat your burgers despite all you know about what happens to the world your children are supposed to grow up in, then you will. And the fact that you still don't doesn't make anything we here have said any less correct.
You see what you wish to see, and there's a world full of media, politicians and industries out there who utilize that quality of yours to their own benefit. You will never stop wanting more, no matter how much you have, just like any other creature on the face of the earth.
So you might as well leave now while you can still catch up with the last wagons of the circus that's leaving. You'd be useless around here if you didn't.
Well my soul checked out missing as I sat listening
To the hours and minutes tickin away
Yeah, just sittin around waitin for my life to begin
While it was all just slippin away.
Im tired of waitin for tomorrow to come
Or that train to come roarin round the bend.
I got a new suit of clothes a pretty red rose
And a woman I can call my friend
These are better days baby
Yeah theres better days shining through
These are better days baby
Better days with a girl like you
Well I took a piss at fortunes sweet kiss
Its like eatin caviar and dirt
Its a sad funny ending to find yourself pretending
A rich man in a poor mans shirt
Now my ass was draggin when from a passin gypsy wagon
Your heart like a diamond shone
Tonight Im layin in your arms carvin lucky charms
Out of these heard luck bones
These are better days baby
These are better days its true
These are better days
Theres better days shining through
Now a life of leisure and a pirates treasure
Dont make much for tragedy
But its a sad man my friend whos livin in his own skin
And cant stand the company
Every fools got a reason to feelin sorry for himself
And turn his heart to stone
Tonight this fools halfway to heaven and just a mile outta hell
And I feel like Im comin home
These are better days baby
Theres better days shining through
These are better days
Better days with a girl like you
These are better days baby
These are better days its true
These are better days
Better days are shining through
Small-business owners’ outlook dims
Small-business owners aren’t convinced the recession is ending and their outlooks darkened in July, according to a monthly survey conducted by the National Federation of Independent Business. NFIB’s index of small-business indicators fell 1.3 points last month to 86.5, the second consecutive monthly decline. The biggest reason was a drop in the number of small-business owners who expect the economy to improve in the next six months.
“The recession is wearing Main Street folks down,” says Bill Dunkelberg, NFIB chief economist. “And unfortunately, lawmakers in Washington are doing more to scare small-business owners than to reassure them of an economic recovery.” Small-business owners are worried about higher taxes and proposed mandates to provide health insurance, Dunkelberg says. Taxes were cited as the No. 1 business problem by 22 percent of the small-business owners surveyed. A bigger problem, cited by 32 percent, was poor sales.
What the Stress Tests Didn’t Predict
by Gretchen Morgenson
Financial stocks have more than doubled from their March 2009 lows. And with autumn — generally a rocky season for the markets — fast approaching, it’s a good time for a reality check on the banking sector. The goal: to determine whether fundamentals in the industry support the rocket-fueled surge in bank shares.
To be sure, the stock market and smart money often try to anticipate recoveries long before they are evident in the numbers. But a “relief rally” — that is, the exuberance that accompanied the fact that our economy appears to have avoided another Great Depression — won’t have the same staying power as a move based on solidly improving operations. So understanding what’s going on in banks’ financial statements is worthwhile.
With that in mind, Christopher Whalen, managing director at Institutional Risk Analytics, a research firm, has analyzed financial data from the second quarter of this year that almost 7,000 banks submitted to the Federal Deposit Insurance Corporation. The data includes 90 percent of institutions with federally insured deposits but excludes reports from the 19 money-center banks like Citigroup, Bank of America and Wells Fargo. Those reports are filed later to the F.D.I.C.
Even with the big guys missing from the analysis, it is an illuminating look at the health of regional and community banks and a fairly comprehensive assessment of the industry’s well-being. Unfortunately, that assessment shows that the number of financially sound banks is declining and that the ranks of troubled institutions are growing. Indeed, Mr. Whalen said his figures show more stress in the banking industry in the second quarter of 2009 than in the immediately previous periods.
For example, Institutional Risk Analytics gave 4,234 banks a rating of A+ or A (as a measure of their financial soundness) as of June 30. That total was down 21 percent from the end of March and 25 percent from the end of 2008. Meanwhile, it slapped a failing grade on 1,882 banks as of June 30, up 16.5 percent from the end of March; the number with failing grades had dropped a bit in the first quarter. This downward migration is a sign that more banks are now feeling the effects of economic conditions regardless of their business models, Mr. Whalen said. In other words, even the best-run banks are having trouble escaping the impact of a sluggish economy and high unemployment.
Based on his preliminary review of individual bank reports, Mr. Whalen said the greater stress across the industry results from the large number of banks getting dinged by losses or charge-offs. The figures, Mr. Whalen said, call into question assumptions made by the government earlier this year, when it put major banks through “stress tests.” In short, the tests may not have been tough enough. “The stress tests said that through the two-year cycle, big banks had to have enough capital plus earnings to withstand a 9 percent loss rate,” Mr. Whalen said. “But what we’re seeing with the levels of stress in the industry is that we are there now and we are not at peak of cycle yet.”
The government’s stress tests also assumed that the third quarter would show a bit of an improvement, and Mr. Whalen does not necessarily disagree. But any reduction in losses in that quarter may also be short-lived. “The third quarter may be a little rah-rah in terms of loss rates,” Mr. Whalen said, “but if the economy isn’t dramatically improving, then the fourth quarter of this year and the first quarter of 2010 will be another leg down.”
The good news is that some banks have raised capital during these past few months of investor optimism. But a host of operational problems remains at many institutions. In addition to loan losses and rock-bottom recovery rates on assets they’re trying to unload, for example, banks also face rising expenses (because they’re paying to carry properties that generate scant — or zero — revenue). All of this cuts significantly into earnings, which banks desperately need to bolster their battered financial positions.
With banks short on revenue, they cannot apportion enough for reserves against future loan losses. “In bad periods,” Mr. Whalen said, “banks typically set aside twice as much as they charge off, but now a lot of them are at one-to-one.” Later this year, Mr. Whalen said, banks that stayed on the straight and narrow and dealt swiftly with their problems will start to emerge from the morass. “But we will still have a very large percentage of the population experiencing problems going into the end of the year,” he said.
Surely, investors in financial companies have earned a respite from their long slog of losses, and the recent rally has been a tonic for damaged stock portfolios. But it’s simply not clear that the banking industry is out of the woods. It took many years to inflate the enormous debt bubble that popped in 2007. The deleveraging process, which is nobody’s idea of fun, will take a long time, too.
Central Bankers Breathing Easier
Central bankers at the Federal Reserve's annual retreat in the Grand Tetons are breathing easier about the outlook for the global economy than just a few months ago. "Fears of financial collapse have receded substantially," Federal Reserve Chairman Ben Bernanke said Friday at the Federal Reserve Bank of Kansas City's conference here. "After contracting sharply over the past year, economic activity appears to be leveling out, both in the U.S. and abroad, and the prospects for a return to growth in the next year appear good."
As he spoke, the latest bit of good news was released: Sales of existing homes in the U.S. jumped 7.2% in July, the fourth straight rise. European Central Bank Chairman Jean-Claude Trichet echoed Mr. Bernanke's remarks, saying it was "almost miraculous" that financial officials around the world moved as quickly as they did after the shocks of September. But Mr. Bernanke cautioned that "strains persist in many financial markets" and that "the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
Stanley Fischer, governor of the Bank of Israel and a prominent macroeconomist, emphasized the uncertainty that lingers. "Much remains to be done, not least in bringing banking systems back to health, and there are good -- though not conclusive -- reasons to fear a substandard recovery," he said. Three economists from the Bank for International Settlements, the central bankers' central bank based in Basel, Switzerland, said at the conference that it could take until the second half of 2010 before output in some of the economies most affected by the financial crisis returns to precrisis levels. Some economists at the meeting thought that too optimistic. Signs of economic recovery put central bankers in a delicate position: They must pull back from their rescue programs and raise interest rates in time to avoid inflation but not so soon that they kill the recovery in its infancy.
The Fed has begun allowing some of its rescue programs to expire. But with the economy burdened by high unemployment, fragile housing and banking sectors, and excess manufacturing capacity, officials don't foresee raising interest rates any time soon. The atmosphere in Jackson Hole was palpably less tense than the previous two years. Mr. Bernanke flew in Thursday and set off on a hike with Fed Vice Chairman Donald Kohn, Fed governor Kevin Warsh, a security detail and Fed staff. Last year, Fed officials spent most of their time at Jackson Hole in a makeshift command center, plotting how to respond to the crisis. The command center is ready at this meeting but hasn't seen much use.
Mr. Bernanke said the multitude of Fed programs launched since last year's collapse of Lehman Brothers has diffused the panic. When finance ministers and central bankers from the world's biggest economies committed to not allow any other big financial institutions to fail in October, he said, it proved to be a "watershed" event that helped to turn short-term credit markets toward recovery. He credited other programs -- such as an effort to restore issuance of debt securities backed by auto loans and credit-card debt -- with helping to revive some markets.
"History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs," Mr. Bernanke said. "In this episode, by contrast, policy makers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."
Thank ye, Bernanke!
The world is filled with mealy-mouthed, hedge-happy, carping, waffling economists, but praise the Lord, Ben Bernanke isn't one of them. I grew up in a world where, if you were the head of the Fed and you were asked whether you would like some peas with your mashed potatoes, you were to reply, "Perhaps. Time will tell." That's not our Ben's style, not one bit. This morning the internet is buzzing with his clear, concise statement that we're on our way to a nice, measured recovery.
Speaking at a boondoggle of some kind in Jackson Hole, Wyoming (which was created for that purpose), the head Fed said that "economic activity appears to be leveling out, both in the United States and abroad." For a guy in his position, that is the equivalent of jumping up and down with a propeller beanie on your head, painting your face red and blue and screaming, "We're Number One!"
In completely, utterly and thoroughly related news, the stock market immediately swung to yearly highs. Pavlov was right! If you show a dog a piece of meat -- it WILL drool! And a good thing, too!
Ilargi: Brilliant! Raise those rates! And then see what happens........ What is it, the Air That Blows up Jackson's Hole?
Fed rate boosts should be aggressive
When time comes for the Federal Reserve and other central banks to ward off inflation by boosting interest rates from the current super-low levels, they shouldn't pussyfoot around, an economist and expert on monetary policy warned Saturday. Even though the U.S. and the global economy are healing from the worst recession since the 1930s, many economists think it will be a while before central banks start lifting rates. In the United States, economists think the Fed won't begin pushing up rates until next summer.
Still, when that decision is made, interest rates will need to be "increased aggressively," said Carl Walsh, professor at the University of California, Santa Cruz, discussing a paper he presented on the topic at the final day of an annual Fed conference here. "Committing to a gradual increase in the policy rate is not justified," he said. Consumers, businesses and investors, he argued, must feel more confident that prices won't spiral higher in the future. Or as Walsh put it, so that their inflation expectations don't become "unanchored."
The high-stakes matter of when and how the Fed should start boosting record low interest rates and reel in the trillions of dollars it's pumped into the financial system came up frequently during discussions at the conference. Timing is vital. Act too fast, and the Fed risks choking off lending to businesses and everyday Americans. Wait too long, and it risks setting off crippling inflation. Although some participants seemed to have mixed thoughts on how quickly the Fed would need to push up rates once it starts tightening, many agreed that it will be critical for the Fed to communicate its intentions clearly to avoid confusion and jolts to financial markets.
Earlier this month, the Fed left the target range for its bank lending rate at zero to 0.25 percent. And it pledged to keep it there for an extended period to help nurture an economic recovery. The rationale: Super-cheap lending will lead Americans to spend more, which will support the economy. If the Fed holds rates steady, commercial banks' prime lending rate will stay at about 3.25 percent, the lowest in decades. That rate is used as a peg for rates on home equity loans, certain credit cards and other consumer loans. To battle the recession, the Fed and other central banks around the world have slashed interest rates to near zero and rolled out a number of extraordinary programs to get credit flowing again and to stabilize financial markets.
America May Need to Find Another Financier
by Floyd Norris
As the United States rolls up record budget deficits, Asian countries are showing a reduced willingness to finance the debt. Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month. Monthly figures can be volatile, and can be revised, so it is risky to draw conclusions from one month’s data. In May, China increased its holdings by $38 billion, according to the Treasury figures.
Nonetheless, the decline highlighted a fact shown in the accompanying graphics: Asia’s appetite for Treasury securities is not growing as fast as it once did. That means the United States will have to turn to other buyers, including American citizens, who are now saving as they did not do during the boom years, to finance the deficits. China and Hong Kong, which is reported separately but is combined under China in the accompanying graphic, together covered more than half of the increase in the amount of Treasuries sold to the public — that is, to buyers other than United States government agencies like the Federal Reserve or Social Security — in 2006.
That share had fallen to 22 percent last year, when the government increased its public debt by a record $1.2 trillion. In the first half of 2009, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasuries that were sold. Japan, which was replaced by China as the largest foreign holder of Treasuries last year, has been a larger buyer this year, taking up 11 percent of the new supply of Treasuries.
The figures include both government and private ownership of Treasuries, and private transactions affect the figures in both Hong Kong and Japan. But in China, the overwhelming ownership is by the government, which has accumulated the securities in part to hold down the value of its currency against the dollar, thus making Chinese exports to the United States more attractive. In recent months, some Chinese officials have indicated concern of inflation in the United States that could erode the real value of their holdings, and have talked of diversifying their investments. The slowed purchases could reflect those concerns, or could simply be a result of China’s own aggressive stimulus program, which has involved large public spending.
The charts reflect ownership of Treasuries by China and Hong Kong, Japan and four other countries — South Korea, Singapore, Taiwan and Thailand — since 1994. On a dollar basis, the holdings are increasing, but their share of outstanding Treasuries has stopped growing. Over the decade from 1994 to 2004, their combined share of Treasuries rose to 25 percent, from less than 8 percent. Since then, as budget deficits in the United States grew, the share has fluctuated within a narrow range. In June, it was 24.7 percent.
Numbers, just numbers
As of June 30, 2009, nationwide there is:
- $10.1 TRILLION in Mortgage Debt. And over 40% of that debt is now underwater.
- In California alone, there is $2.4 TRILLION in mortgage debt, and 42% of that is now underwater.
- That's 4 out of 10 homeowners underwater. If the S&P Case-Schiller® Index even inches down, we'll be talking about 50% faster than you can spell HAMP.
- Real unemployment over 16%.
- Equity evaporating faster than lighter fluid on a linoleum floor.
Oh yeah, we're on the way back, baby. Things are really looking up.
No Recovery, Not Now… Not Ever
by Bill Bonner
That we live in an age of miracles has become common knowledge. A man may sit on a beach near Sydney, with nothing but the bucket bottom of the universe over his head, and still carry on a casual conversation with an Eskimo near the North Pole. Using an Internet-based phone service, he may do so at negligible cost. If this were not miracle enough, he may now grow himself a new nose, if he needs one, on his own arm. In this age of miracles, people seem ready to believe that anything is possible. Recklessly crossing the street at the end of the Late Bubble Epoque, the world economy got hit by a cross-town bus. Now, the feds propose to reverse and run over the poor fellow again. It will be as if they had reversed the film; the economy will be as good as new, they say. But we are suspicious. And we begin today’s rumination by examining the bus driver’s motives.
In its naked form, government is not evil; it is merely a self-interested parasite, like a bank lobbyist. Its main value comes from its ability to elbow out other parasites. Of course, the typical citizen is no saint either. Instead, he is merely a parasite in the larval stage. If he is lucky enough or cunning enough, he could grow into a parasite himself. The citizen, generally, doesn’t mind being lied to and robbed – just so long it is by someone he elected. Or at least by someone whom tradition or local connivance put in place. He does not usually resent his homegrown government, even though it routinely costs him a substantial part of his output. On the contrary, he grows so fond of it he even dons his helmet from time to time to protect it. Naturally, the feds return the favor.
The basic business model of government is to keep order, protect campaign contributors and lure supporters with the promise of other peoples’ money. The game plan of the typical citizen is even simpler: to be on the receiving end, not the paying end. Over time, more and more of them get into position. And the whole society becomes more costly, and more corrupt. In the United States, entire industries now operate as wards of the state. They may have too little capital. Or, their operations may be too costly. Or, their products may be simply out-of-date and unattractive. Still, government keeps them going – even at the cost of at the expense of competitors.
And the money doesn’t only go to business. Cities stay solvent only by the grace of federal government grants. Whole sections of the population depend on government – including 34 million who draw their rations directly from the federal food stamp program. The spectacle is breathtaking and alarming at the same time – like a Pakistani bus on a mountain road, freighted with passengers clinging to the roof. The old rust bucket could tip over at any time, but what politician would tell a voter to get off?
That preface on the state out of the way, we turn to the state of the economy. The key to understanding the great credit bubble of 1945-2007 is to capture the codependent relationship between China and the United States of America. It seemed to serve both parties well. Each enabled each other’s excess. China added mightily to the world’s supply – far more than was actually needed. America, meanwhile, did heroic work on the demand side. While the growth in the United States was led by consumer spending, the growth in China was led by capital investment; factories expanded, towns were built, and output was revved up. But there was a flaw. Americans ran out of money. After the ’70s, they could only increase their buying by going into debt. This they did with insouciance bordering on insanity. Total debt rose 370% of GDP and then blew up in 2007, with major lenders forced into bankruptcy and mergers, while GDP sank at its fastest pace since the end of WWII.
Now, the old formula no longer works – neither for Americans nor for the Chinese. Despite the urging of their government, Americans cannot be expected to take on more debt in order to consume more stuff from China. As savings rates grow toward 10%, demand from the United States will collapse by an estimated $1 trillion per year. With the China trade now accounting for 83% of America’s non-oil trade deficit, you’d think the Chinese would panic. They already have as much as two times the output capacity needed to meet real demand. They should trim their manufacturing sector, not expand it.
We draw out that relationship only to show how hopeless it would be to draw it out further. Borrowing to consume is merely tricking stuff from the future to enjoy in the present. By 2007, some $30 trillion worth of spending that would have occurred ‘in the future’ had already occurred in the past. Factories that would have produced consumer items for 2009 discovered that they had already produced more than enough of them in 2005 and 2006. It would be better to invite the future in…let her collect her debts…and then get on with things. Yet government officials on both sides of the Pacific continue their numbskull efforts to revive the bubble economy. On the US side, the feds are trying to stimulate demand for more stuff. On the far side, Chinese stimulation is going into producing more stuff. As if the world didn’t have too much stuff already.
But the role of government is neither prosperity nor plausibility…but protection of the pests and parasites. They will keep paying them off and carrying them along…until the bus runs off the road. But it’s not prosperity that government really cares about. The big bus keeps trundling along – picking up pests and parasites along the way. It will keep going until it runs off the road.
Robert Kennedy on GDP
Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.
It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife. And the television programs which glorify violence in order to sell toys to our children.
Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.
Robert F. Kennedy
University of Kansas
March 18, 1968
Ilargi: Good to see Orlov makes the same point I do. If you sell poeple's basic needs for profit, you wind up selling people for profit. Which may seem sort of OK, but only until there's no more profit to be made, and the system demands you throw them out.
by Dmitry Orlov
I would like to sell you some hunger insurance. Are you insured against hunger? Perhaps you should be! Without this coverage, you may find it impossible to continue to afford feeding yourself and your family. With this coverage, not only will you be assured of continuing to get at least some food, but so will I. In fact, thanks to this plan, I will get to eat very, very well indeed.
Here's how it works. You buy a hunger insurance plan from my hunger insurance company, or from one of my illustrious competitors in the hunger insurance industry. The hunger insurance market is very competitive, offering you plenty of consumer choice. You can even decide to go with a hunger maintenance organization (HMO); that would make a lot of sense if you are on a diet.
Whichever company you choose buys up food in bulk on your behalf. Then, should you come down with a case of hunger, you can file a claim, pay the copayment, and get some of the food. Certain feeding procedures, such as breakfast, are considered elective, and are not covered.
The company is in a position to demand lower prices for food from the food providers, and can even pass some of these savings on to you. (But the fine folks in the hunger insurance company do have to eat too, you know.) Of course, the food providers try to make up the difference by charging those without hunger insurance much higher prices, but how can anyone blame them? That's just market economics. There may also be some food-related benefits, such as lower rental rates on bowls, spoons, napkins and feeding tubes (check the details of your plan).
There is just one more twist: you should try to arrange your hunger insurance plan through your employer. You see, it is much more expensive for companies to do business with consumers directly. It is much cheaper and easier for them to deal with other companies, and this allows them to, again, pass along some of the savings. In fact, many hunger insurers may decide not to sell individual hunger plans because group hunger is much more profitable. This is just Business 101: nothing personal. Plus, how can you afford to pay your hunger premium every month if you are unemployed? It goes without saying that if you want to keep your hunger insurance, you better try to keep your job, whether they pay you or not! And if you are currently unemployed, then, well... why am I still talking to you?
I am sure you will agree that this is a damn good system: it offers you consumer choice, a healthy diet, and, most importantly, peace of mind. But, as you may have heard, some people have been clamoring for a so-called "single-feeder system" run by the government. Now, that sort of thing may be very well for those miserable communists, but let me ask you a couple of questions.
First: Do you want to get fed the same as everyone else, even if you can afford to pay a little extra? What if you, say, win the lottery; wouldn't you want to upgrade to the premium plan, and dine on filet mignon, foie gras and truffles like I do instead of the corporate-government-provided Happi-Meals?
But even more importantly, who do you want your children to be when they grow up: lowly, overworked, underpaid government bureaucrats, or fat-cat capitalists like me? Isn't this compelling vision of hope worth tightening your belt for? To be perfectly honest, those jobs are reserved for my children, but yours might still be able to find work as their personal bathroom assistants, if they are docile and pretty... let's pretend you didn't hear that.
But ultimately it is still all up to you, because it is you who, every few years, walks into a voting booth and pulls a lever. And then I have to work with whoever you elect, and bring them around to seeing things my way. We are in this together, you see: you get to pull the lever, but I get to write the checks, with your money. Politicians have to eat too, you know, I am there to help them, and they know it.
Is that your stomach growling, or are you just happy to see me?
Why [..] Economists Are All Wrong
US Personal Income has taken its worst annual decline since 1950.
This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal 'print and trickle down' approach. In the 1950's the solution was huge public works projects like the Interstate Highway System and of course the Korean War.
Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.
The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous.
On paper it is obvious that a market can 'clear' at a variety of levels, if wages and prices are allowed to move freely. After all, if profits are diminished, income can obviously be diminished by a proportional amount, and nothing has really changed in terms of viable consumption.
The Supply side idealists (cash rich bosses, Austrians, neo-liberal, monetarist, and deflationist theorists) would like to see this happen at a lower level through a deflationary spiral. The Keynesians and neo-classicals wish to see it driven through the Demand side, with higher wages rising to meet the demands of profit in an inflationary expansion. Both believe that market forces alone can achieve this equilibrium. Across both groups runs a sub-category of statism vs. individualism.
Unfortunately both groups are wrong.
Both approaches require an ideal, almost frictionless, objectively rational, and honest economy in order to succeed. The Keynesians have a bit of an edge in this, because it is easier to control inflation than deflation in a fiat regime, and the natural growth of inflation tends to satiate the impulse to greed. They don't care if they can buy more as long as they can say they HAVE more. People tend to be irrational, and there is a percentage of the population that is irrationally greedy and obsessively rapacious. People are not naturally 'good.'
The greatest flaw in the many studies that come from each of the schools to prove their point is the brutal way in which they flatten the reality of the markets and make assumptions to allow their equations and analysis to 'work.' They spend most of their energy showing while the 'other school' is a group of ignorant fools, doomed to ignominious failure, in an atmosphere reminiscent of a university departmental meeting.
This has quietly scandalized those from other scientific disciplines who review the work of many of the leading economists. Benoit Mandelbrot was poking enormous holes in the work of the leading economists long before Nassim Taleb made it more widely known. The ugly truth is that economics is a science in the way that medicine was a profession while it still used leeches to balance a person's vapours. Yes, some are always better than others, and certainly more entertaining, but they all tended to kill their patients.
The most intractable part of the current financial crisis, and the ongoing problem of the US economy is the huge tax which is levied on the American public by its corporations, primarily in the financial and health care sectors, and a political system based on lobbyists and their campaign contributions.
There are hidden taxes and impediments to 'free trade' at every turn. The ugly truth is that capitalism-in-practice hates free markets, always seeking to overturn the rules and impose oligopoly if not outright monopoly through barriers to entry, manipulation of the political process, distortion of regulation, predatory pricing, brute force, and the usual slate of anti-trust practices.
Some of these 'hidden taxes' are the bonuses on Wall Street which require an increasing percentage of the financial 'action.' The credit cards fees and penalties levied by banks to support profits in a contracting economy. The Sales General & Administrative portion of the Income Statements of the pharmaceutical industry which only American consumers seem willing to pay. A health care system which is a monument to overspending, outrageous pricing, and greed.
The notion that "if only government would not regulate markets at all everything would be fine" is a variation of Rousseau's romantic notion of the noble savage which no one believes except those who wish to continue to act like savages, and those who get no closer to the real work of an economy than their textbooks. Economic Darwinism works primarily to the advantage of the sharks. Anyone who believes that 'no regulations' works well has never driven on a modern highway at peak periods.
Yes, a certain portion of the population are adult, and generally good and fair. But there is a percentage of the population that is not. And since the 1980's they have been encouraged by the culture of relativism and greed to 'express themselves' and so they have, with a vengeance.
Discussion rarely proceeds very far because of the dialectical nature of American thought. Both extremes are wrong, but they seem to content to merely bash each other, pointing out their errors, while repeating the same mistakes over and again.
The engineering of the economy has become married to the engineering of the political dialogue by the corporate media and their political parties. "The engineering of consent is the very essence of the democratic process, the freedom to persuade and suggest." Edward L. Bernays 1947
The condition of the American economy is strikingly similar to the Soviet state economy of the last two decades of the 20th century. People are trying to sustain a system "as is" that is based on bad assumptions, unworkable constructions, conflicting objectives, and a flagging empire laced heavily with elitist fraud and corruption. The primary difference is that the US has a bigger gun and its hand is in more people's pockets with the dollar as the world's reserve currency. But the comparison seems to indicate that the economy must indeed fail first, before genuine change can begin, because the familiar ideology and practices must clearly fail before they can recede sufficiently to make room for new ways and reforms.
A new school of Economics will rise out of the ashes of the failure of the American economy as happened after the Great Depression. Let us hope that it is better than what we have today.
In the short term, what does all this mean?
There is NO system that will work without substantial, continuing effort, and continual adaptation and commitment to a certain set of goals that are more about 'ends' than ideological process.
Because our system has been abused for so long, and is so distorted and imbalanced and dominated by a relatively few organizations beholden to a self-serving status quo, reform is not an afterthought, it is the sine qua non.
It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery.
Nearly One in Two Mortgages in Ohio is Underwater or Close to it
Data released today by the Mortgage Bankers Association coupled with analysis of a report released last week by First American CoreLogic spell more trouble ahead for Ohio’s housing crisis, and offer fresh evidence for the need for statewide foreclosure reform. MBA numbers show delinquency rates (those who are late, but not yet in foreclosure) for mortgage loans on residential properties making a 13 percent leap from 1st QTR to 2nd QTR 2009, increasing from 8.7 percent to 9.8 percent. The numbers also show that 14.3% or 1 in 7 Ohio homeowners with mortgages were delinquent or already in foreclosure. That is up from 13% three months earlier.
CoreLogic data focuses on outstanding mortgages that are in a negative equity position, an often-overlooked, but important gauge. Also known as “underwater,” mortgage holders with negative equity owe more on their mortgages than their homes are worth. Of the 2.2 million outstanding mortgages in Ohio, 45.6 percent - more than one million mortgages - are already underwater or close to it. In October 2008, CoreLogic pegged that figure at 29.1 percent for Ohio, which translates to a 56.7 percent leap in just nine months.
“In addition to the 7,000 or so foreclosures each month in Ohio, we have more than one million mortgages in a very fragile position,” said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, and an advocate for House Bill 3, foreclosure reform legislation. “A slight increase in unemployment could push tens of thousands more into the foreclosure pipeline. A million mortgages on the edge of crisis should push the Ohio Senate to make foreclosure reform the top priority in the fall.”
House Bill 3 (Foley/Driehaus) passed the Ohio House in May and now awaits Senate attention. Moderated from its original form, House Bill 3 regulates servicers to process reasonable work-outs on a meaningful scale; provides a time out to homeowners and lenders to implement hanges and await impact of the federal response; and creates a fee that discourages foreclosure filings while funding community redevelopment.
CoreLogic also cited three of Ohio’s largest cities on the list of the nation’s top 20 cities with the highest number of underwater mortgages outstanding, including Cleveland at 51.1 percent; Columbus at 47.5 percent; and Cincinnati at 43.8 percent. “I think this is staggering . . . damning evidence against the lenders’ continued inability to get their arms around the foreclosure problem,” said Paul Bellamy, director of the Cuyahoga County Foreclosure Prevention Program. “Servicers should be doing loan modifications on a vastly larger scale. We have to change the laws that are fueling this bonfire of our state’s accumulated wealth.”
Ohio joins California, Florida, New Jersey, Illinois and Arizona as the top states in the nation with the most number of properties either in or approaching negative equity position, according to the report. “With negative equity so high, a sustainable loan modification makes sense for everyone, including the owners of the mortgage.” said Faith. “For lenders, homeowners and communities in Ohio, HB 3 would turn losing into winning.”
Wells Fargo Shuns Some ETFs
Wells Fargo Advisors is no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts. The policy has been in place for several weeks, according to a Wells Fargo adviser in the bank brokerage channel. "As a matter of firm policy, we can't solicit those products," the adviser said, adding that the change affects a small number of brokers. Clients still may buy leveraged or inverse ETFs unsolicited through a nonfee-based account if the profile on the account includes "trading and speculation," the adviser said.
A Wells Fargo Advisors representative had no comment on its sales policies regarding leveraged and inverse ETFs. In an email last month, the representative said the company was reviewing its policy regarding nontraditional ETFs.
Small Investors Face Big Hit in ETF Push
U.S. regulators have begun targeting the big-time speculators suspected of artificially inflating prices for oil, natural gas and gold. Turns out some of the big guys happen to be small fry. Exchange-traded funds, which have become popular as one of the few avenues for small investors to gain direct exposure to commodity futures, are a top target in the Commodity Futures Trading Commission's drive to rein in speculation in oil markets. The CFTC's moves reverse a trend in market innovation that allowed almost anyone to bet on the direction of energy prices along with the likes of Goldman Sachs Group Inc.
And bet they did. Commodity ETFs came into existence in 2003 just as the boom in commodities prices was getting under way. They have ballooned to hold $59.3 billion in assets as of July, according to the National Stock Exchange. Since the beginning of the year, $22.1 billion has flowed into these funds compared with inflows of $7.3 billion during the same period in 2008. Almost half of the new money that has come in this year has been directed at the largest commodity ETF, which buys gold, amid worries about inflation.
The funds pool money from investors to make one-way bets, usually on rising prices. Some say this causes runaway buying that ignores bearish signs that more knowledgeable investors and commercial hedgers usually heed. The CFTC has said its priority is to protect end consumers of commodities, who would benefit from lower prices that regulators and lawmakers say would result from limits on speculation. Cutting out individual investors isn't the goal, said Bart Chilton, a CFTC commissioner, in an email. "The Commission has never said 'You aren't tall enough to ride,' " Mr. Chilton said. "I don't want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation -- intentional or otherwise."
Yet the coming regulatory changes are already reshaping this popular corner of the investing world for small investors. Limiting the size of ETFs will result in higher costs for investors, ranging from individuals to banks and hedge funds with multimillion-dollar positions, because legal and operational costs have to be spread out over a fewer number of shares. It also would render the instruments less desirable, because prices of the shares of closed funds tend to deviate from price moves in the underlying commodity.
Already, U.S. Natural Gas Fund, or UNG, is trading at a 16% premium to gas futures because investors are willing to pay extra for the ability to expose their portfolios to the commodity. The PowerShares DB Oil Fund, which tracks crude futures with no share limit, traded 0.3% above its benchmark commodity Thursday. This past week, UNG confirmed it wouldn't issue more new shares and said it owns about a fifth of certain benchmark gas contracts, potentially higher than the new limits will allow. Deutsche Bank AG's PowerShares DB Crude Oil Double Long ETN, or exchange-traded note, an ETF-like security similar to a bond, followed suit on Tuesday.
The CFTC said Wednesday that it withdrew exemptions it had granted two Deutsche Bank commodity ETFs years ago on speculative limits on corn and wheat contracts. On Friday, Barclays PLC said it would temporarily suspend any new share issues for its natural-gas ETN. "What you're really saying is the only people who should be allowed to trade crude oil are oil companies and Morgan Stanley," John Hyland, chief investment officer for the company that manages UNG and the largest oil ETF, told CFTC commissioners in a hearing earlier this month. He defended his funds as existing "to serve people who otherwise would find it difficult or undesirable to themselves buy futures."
Goldman Sachs and Morgan Stanley are two of the banks seen as most active in commodities trading. They also are likely to feel the impact from the new rules. Mr. Hyland claims between 500,000 and 600,000 investors in his U.S. Oil Fund and UNG, both of which have come under scrutiny due their sheer size. Vernon Reaser is one of those investors and says he is frustrated that regulators' actions are essentially discouraging him from accessing commodities markets. "I'm American and am all for stability," said the 43-year-old small-business owner in Houston. While small investors tend to shy away from futures because of high costs and margin requirements, without ETFs, "there's nothing left but futures," Mr. Reaser said.
Smaller funds could spring up to take in investors prevented from joining funds that have run afoul of federal limits, but at a price. "If they give up on scale and have to drive their expense ratios up ... that just makes it a higher bar for the fund to jump to generate positive returns," said Mark Willoughby, a financial adviser with Modera Wealth Management in Old Tappan, N.J. Mr. Willoughby recommends that most clients invest 4% to 7% of their holdings in commodities, but said his firm is debating the best ways to do so in light of recent developments. Investors shut out of ETFs would still have a few ways to track commodity prices, such as a major oil company like Exxon Mobil Corp. Shares of such companies usually, but not always, move with energy prices.
China Said to Plan Rules Tightening Capital of Banks
China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said. The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.
As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12 percent minimum. Chinese stocks briefly entered a so-called bear market this week on concern the government would stymie new loans that exceeded $1 trillion in the first half. A news department official at the regulator declined to comment by phone and didn’t immediately respond to a faxed inquiry. “This move will cut one of the most important funding sources for banks,” said Sheng Nan, an analyst at UOB Kayhian Investment Co. in Shanghai. Banks will “have to either raise more equity capital or slow down lending and other capital consuming businesses to stay afloat.”
China’s benchmark Shanghai Composite Index rose 0.7 percent as of 1:52 p.m., paring earlier gains of as much as 2 percent. Hong Kong’s Hang Seng Index fell 1.6 percent at the 12:30 p.m. break, after having risen as much as 0.5 percent. China’s banks have sold 236.7 billion yuan ($34.6 billion) of subordinated bonds so far this year, almost triple the amount issued during all of 2008. The banking regulator estimates about half of the subordinated bonds in circulation are cross-held among banks.
“We understand the regulator’s concerns about the proportion of subordinated debt,” Shenzhen Development Bank Co. Chairman Frank Newman said on an earnings conference call today. The bank hopes that any new rules are applied only to future debt sales, Newman said. The subordinated debt sales came as new loans rose to a record 7.37 trillion yuan in the first half. Lending in July fell to less than a quarter of June’s level. About 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s cabinet.
“I’m worried about a correction in a market that has been driven by cheap money,” Devan Kaloo, who oversees $11.5 billion as head of global emerging markets at Aberdeen Asset Management Ltd., said Aug. 19. The Shanghai Composite Index almost doubled during the first seven months of this year through Aug. 4, after falling 65 percent in 2008. Since reaching this year’s high on Aug. 4, it’s plummeted 15 percent. The index on Aug. 19 briefly fell 20 percent from this year’s high, the threshold for a bear market, before ending the day down 19.8 percent. The gauge rebounded yesterday, rising 4.5 percent.
The weighted average capital adequacy ratio of 205 commercial Chinese banks at the end of 2008 was 12 percent, up 3.7 percentage points from a year earlier, according to the industry’s annual report. The weighting was strongly affected by the nation’s five-largest banks, which account for 52 percent of assets in the industry. The banking regulator has indicated it’s concerned about excessive credit creation. Last month, the commission ordered lenders to raise reserves against non-performing loans, to ensure loans for fixed asset investments go to projects that support the real economy and announced plans to tighten rules on working capital loans.
Banks are allowed to count subordinated bonds they sell as supplementary or lower-Tier 2 capital. In the event of bankruptcy, holders of subordinated notes receive payment only after other debt claims are paid in full. The regulator’s rule change requires banks to subtract all existing holdings of subordinate bonds issued by other lenders from their own subordinated bonds being counted as supplementary capital. The Wall Street Journal and Reuters reported earlier that the regulator was considering this measure.
In addition, the new rules also limit the amount of subordinated or hybrid bonds banks can hold, the people said. A bank’s holding of subordinated and hybrid bonds issued by a single bank can’t exceed 15 percent of its core capital, the people said. Holdings of all subordinate and hybrid bonds issued by banks can’t exceed 20 percent of core capital. The regulator has called on small publicly traded banks to have a minimum capital adequacy ratio of 12 percent by year’s end, up from the current 10 percent. The ratio, a measure of how much in losses a bank can absorb, is calculated by dividing capital by risk-weighted assets. A bank’s risk-weighted assets are comprised partly of loans.
After deducting subordinated bonds issued by other banks, lenders must either raise core capital or reduce their loans to meet the capital adequacy ratio requirements. “It’ll be hard for commercial banks to sell subordinate bonds because much of the debt is sold to their counterparts,” said Xu Xiaoqing, a bond analyst at China International Capital Corp. in Beijing. “This rule would tighten lending by commercial banks, especially small and medium sized banks that have relatively less capital.”
Days Away From Economic Chaos?
America is just a few days away from a possible day of reckoning. I again call attention to this day, August 25, when the Federal Deposit Insurance Corporation issues its 2nd Quarter report for 2009 on the state of health of American banks.
It has not particularly alarmed Americans that its growth and prosperity have been built upon debt. The American public is a bit desensitized, particularly since the Y2K threat fizzled. We must wait and see how Americans respond to the upcoming FDIC report.
The following charts tell the story. There are roughly 8400 American banks that set aside a small portion of their profits to aggregately insure bank depositors should their local bank fail. A plethora of bank failures has depleted the FDIC reserve fund from $52.8 billion in 2008 to $13 billion in the 1st Quarter of 2009. (See chart below)
Alison Vekshin, writing for Bloomberg, indicates
"The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence."
Vekshin goes on to report that 56 bank failures since March 31 have cost the FDIC an estimated $16 billion. (For comparison, in the 1st Quarter, bank failures only cost the FDIC $2.2 billion.) That $16 billion bank rescue would fully deplete the FDIC fund as it only had $13 billion at the close of the 1stQuarter. It's possible the FDIC has already tapped into its line of credit at the Treasury Department without setting off alarm bells to the public.
The FDIC is required by law to maintain a reserve ratio, or balance divided by insured deposits, of 1.15 percent. It was at 0.27 percent as of March 31. It could be near zero at the current moment. (See 1st Quarter FDIC reserve ratio chart below)
Banks will be assessed extra fees
The FDIC's 8400 banks will likely be assessed special fees to shore up the FDIC's treasure chest.
Bloomberg's Vekshin, quoting Robert Strand, a senior economist at the American Bankers Association, says the industry will pay $17 billion in premiums this year, including $11.6 billion from the annual fee.
The following chart shows the aggregate profits of all 8400 FDIC-insured banks, which is about $57 billion per quarter. This figure is AFTER the banks have set aside funds for anticipated losses in real estate loans.
Insured institutions set aside $60.9 billion in loan loss provisions in the 1stQ, an increase of $23.7 billion (63.6 percent) from the first quarter of 2008.
Banks have been slow to foreclose, allowing mortgage holders a few months before their home is deemed in default and giving another 2 years before the property is foreclosed on its accounting books. This practice has been able to temporarily hide most of the banking collapse.
But banks must eventually write down their real estate home mortgage losses. First-quarter net charge-offs of $37.8 billion were slightly lower than the $38.5 billion the industry charged-off in the fourth quarter of 2008.
As banks write off bad home loans, this downsizes their asset values. Downsizing at a few large banks caused $302-billion decline in industry assets in the 1stQ. The FDIC report says:
Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts. This is the largest percentage decline in industry assets in a single quarter in the 25 years for which quarterly data are available. Eight large institutions accounted for the entire decline in industry assets;
You can see by the following chart that US banks are directing a great deal of their profits towards write-offs (loss provision in the following chart) for non-paying home mortgages (foreclosures). So the banks only have about $57 billion of profit to direct to the FDIC to shore up its quickly vanishing reserve account. This aggregate profit equates to about $890,000 profit per bank in a quarter. That is a pretty thin margin.
The FDIC, which claimed only about 300 problem banks in the 1st Quarter of 2009, but hid the fact there were about 2000 total lame banks among its 8400 members, This has given rise to the term "zombie banks," which are defined as "a financial institution with an economic net worth that is less than zero, but which continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support."
Examination of the following FDIC chart shows geographically that most banks are not making a profit.
FDIC's $13 billion against $220 billion liabilities
So just how much liability does the FDIC bear aggregately for its "problem banks?"
At the end of the 1st Quarter in 2009 the FDIC said that figure was $220 billion. Remember now, the FDIC had only about $13 billion to over these institutions at the time. (See chart below) This figure will likely grow beyond imagination with the issuance of the FDIC 2ndQ report.
How do American banks make profit today?
So how to American banks make any money today? You can see in the following chart that in the recent past American banks derived most of their profits (45%) from residential and commercial property loans. These income sources are obviously crashing.
So the FDIC 1st Quarter report tells all our so-called conservative American bankers, entrusted with your hard-earned savings, with no place to turn to generate traditional profits, have entered the gambling parlor. Here is how the FDIC said it:
Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009.
Trading revenues means profit generated from trading stocks and other risky investments. Recall, when your money was being financed commercial and residential property it had some collateral behind it. An asset (real estate) was held in balance against the risk of failure to pay the loan. Now bankers are "investing" your money in the stock market in what appears to be a replay of how the Japanese propped up their stock market in recent years by simply having major companies purchase each other's shares to prop up value.
The FDIC's 1stQ report says: "Total equity capital of insured institutions increased by $82.1 billion in the first quarter, the largest quarterly increase since the third quarter of 2004 (when more than half of the increase in equity consisted of goodwill)."
What the hoot is "goodwill" you want to know? It is how the banks are cooking their books. Arbitrary value is being given to bank holdings.
The FDIC 1stQ report goes on to say that:
Most of the aggregate increase in capital was concentrated among a relatively small number of institutions, including some institutions participating in the U.S. Treasury Department's Troubled Asset Relief Program (TARP).
Banks valued by goodwill and bailout funds
So there, you can see that in addition to goodwill, the bank's capital was largely increased by bailout funds. So a dose of reality therapy will lead one to conclude that nearly all American banks are essentially insolvent.
If this leaves you feeling a bit queasy, well, you may need to reach for Dramamine when you realize the FDIC is not only broke, but it will probably announce it is tapping into its line of credit at the US Treasury Department, which is also insolvent (America is spending $1.58 trillion more than it collects in taxes this year).
Here is how Bloomberg's Vekshin says it:
If the fund is drained, the FDIC also has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.
Compared with savings and loan crisis
American banks weathered the savings and loan/real estate appraisal crisis in the 1980s and 1990s by loading from the US Treasury. In 199192, during the last part of the savings and loan crisis, the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
But just exactly how will American banks ever pay back the treasury while facing years of write-offs from home mortgages? The banks do not have sufficient profits to offset their losses.
The entire cost of the savings and loan crisis of the 1980s and 90s was finally calculated at $153 billion, which was four times the reserves held by the FDIC (FSLIC at the time) in 1982. Of this, taxpayers paid out $124 billion while the thrift industry itself paid $29 billion. (FDIC Banking Review, volume 13, no.2, December 2000) So there is a false notion that the banks underwrite their own members' losses. In fact, the public bears the brunt of the losses when bankers are reckless.
Bankers prodded to loan money
Sheila Bair, FDIC chief, is trying to get US bankers to begin loaning money again. But to do so bankers must begin to assess the worth of real estate at more realistic values. Then the real value of their asset package would be revealed and the banks would all collapse. Furthermore, if banks begin to loan money under their fractional banking scheme (banks loan out 1050 fold more money than they have in reserve), then massive inflation will likely result. This would not only result in Americans bearing the brunt of higher cost of goods and services, but it could trigger Asian banks, seeing their savings devalued, to sell off their stash of US treasury bonds. America as a debtor nation depends upon billions of dollars every day, loaned from Asian banks, to stay afloat financially.
The FDIC's Bair is aghast at American bankers shift away from traditional sources of revenue backed by collateral to risky investments. Bair wants to charge banks additional fees tied to risks when their business expands beyond traditional lending, such as stock trading. This idea hasn't advanced in Congressional committees yet. American bankers are walking a tight rope with their depositors' money.
Now if just a small portion of American bank depositors hear that the FDIC had to tap into the US Treasury for funds, and these depositors feel their banked money is at risk and want to withdraw some of it, the mother of all bank runs could ensue. This could create the day of reckoning that many have predicted. A short banking holiday would have to be declared and who knows what happens from there troops in the streets, issuance of new currency, martial law? Don't think those in the Federal government haven't made plans for such an occurrence.
Of surprising interest, the FDIC reveals that millions of Americans don't trust or don't use banks. These Americans have been called the unbanked or underbanked, meaning that they "do not have access to banks or are not fully participating in the mainstream financial system," says the FDIC. The FDIC guesstimates that 10 percent of American families are "unbanked." That's a lot of capital the banks don't have access to. Those who hold currency outside of banks are anathema to the gods of banking.