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Socialization of the Banking System



May 10, 2008 – Comments (4)

Tedbits by Ty Andros has a good read post about legimate concerns about the banking system. 

When I started thinking through the kinds of thing that can and/or must happen for the economy to fix itself from the mass exuberance and gross levels of M3 growth and derivative growth mass bank failure was one of the conclusion I came to.  When I look at the degree of credit expansion it seems to me that either there is a mass contraction, or we all need to see our wages at least triple just to keep up with the price increases that must come without a contraction.  I see a contraction hurting the wealth the most because they can't hide their assets and their assets are tied to what the struggling owe and the struggling are insolvent. 

Ty argues that the G7 "WILL PRINT THE MONEY." 

I suspect that there will have to be some money printing, but, I think the masses would be better off by some deflation because I can't see wages adjusting to the the current level of money supply without enormous hardship.  With the depression and all the bank failures I read that once it was sorted out people got back about 88c on the dollar.  I look at the difference in the math between the depression and today and I suspect with bank failures 88c on the dollar would be optimistic.  An incredibly key difference in that era compared to today is that mortgages were 15 year terms.  That the standard was changed to 30 years and never changed back. 

That f----- Google.  I can't even get onto my own blog,  I consider this enormously serious.  I hope someone who knows more about computers than I do is raising this with regulators.  Google has overstepped all reasonable boundaries here.  If this isn't sorted out in short order I will be taking steps to stop using google.  It will not be my search engine of choice.  I will stop using their reader and I will find another home for my blog.  This is like a sledge hammer here in terms of realization of the control they have over internet access.  I shall be adding my voice to limiting any further growth of google through anti-trust issues.  I do not like the demonstration of abuse of power.

I was going to point to my posts about on the difference on interest rates.  I have them double posted, on the fool as well.  I actually loaded them to docstoc.  The "Low Interest Rates - The Two Faces of Dr Jekyl and Mr Hyde" is one that I think anyone who disagrees that low interest rates are more harmful than good ought to not just read, but study.  Low interest rates are only beneficial if the principal amount isn't increasing.  I think it is important to appreciate the difference in ability to gain, or not gain, control of debt between low and high interest rates.  Sensible Lending Standards is my analysis of how the fed should be regulating banking so these bubble are not created in the first place and the economy runs on a level playing field and people's hard work and responsible lifestyle is not risked by the gross negligence that has happened. 

We ought to have seen a tightening of lending standards as rates declined, instead we saw a gross loosing through increased percent of qualifying income, reduced down payments and the very nature of lowering interest rates is a loosening of lending standards in itself.

So, we've got a 30-year insolvent mortgage problem that can't be fixed in any way by extending the term, as the mortgage problem was helped during the depression.  This is but one of the reasons I keep coming back to in my assessment that I think what we are seeing is worse than the depression.  Probably printing some money will have to happen.  I don't think they have done so yet, they have just transferred financial burden to tax payers.  Raising taxes will have to happen next, and that will also put pressure on both personal and business balance sheets. 

High taxes in Canada along with a smaller housing bubble seriously limited my ability to pay back mortgage and to spend.  I worked in banks through 20+% interest rates so with a 5-year reset on mortgage rates the lower they got the more concerned I was that the upside risk was increasing.  I drove my husband crazy with pushing up mortgage payments at the expense of lifestyle, and it turned out to be a very good move when we were both hit with pay cuts.  It also turned out to be a very good move simply because of a lack of wage growth period.  My husband's buying power of his income was half in 2005 compared to 1993, though zero increases and a pay cut.

Everyone's experience is different, but BC has an economy about 1% the size of the US economy.  Pretty much anyone in housing by 1990 was ok, but everyone after that was squeezed, so we had a growing percent of the economy struggling to make ends meet and the economy was simply sluggish.  We were able to increase tourism enormously due to the weak dollar.  The US has a larger percent of the economy in dire straights.  Tourism may help, but the areas in trouble are probably 20 times as big as what we had.  That tourism help pie is going to have much smaller slices as choices are much larger.  The same can be said for exports. 

I just see a much larger piece of the US economy dragging the rest down, and that is going to be long term sluggish.  Add on the aging population.  Social transfer costs will be going up faster than at any time in history, though a period when the economy is absolutely struggling.

I get so off track, but in my mind, these problems are the roots of what is leading to socialization of the banking system.

Of interesting note in Ty's post:

"The Bank of England has created a $100 billion dollar facility of its own to backstop the banks. The European Central Bank has not lowered rates but they have created facilities to swap impaired crappy paper assets for government issued bonds in amounts exceeding $500 billion dollars. Banks can no longer fund themselves through the short-term asset backed money markets.

This had to be done to "Protect the Public" from the irresponsibility of the INSOLVENT banking sectors in which they reside. Anything other then this course of action would have resulted in a deflationary depression and widespread bank failures."

Another interesting point in Ty's post and a very scary truth, and the foundation of why I keep saying interest rates are going up...

 "There is a dirty little secret no one is talking about. Private direct investment into the United States has come to a standstill. The external current account and budget deficits are now being financed by foreign central banks almost exclusively. The US is living on the grace of foreign central bankers. They are rightly defending the value of their foreign reserves denominated in dollars and they have trillions and trillions of them to defend."

I suspect the defense of fiat reserves will eventually stop and they will cut their losses.   

The entire post is an interesting read and one I recommend.



4 Comments – Post Your Own

#1) On May 10, 2008 at 2:15 PM, dwot (28.95) wrote:

The mood on Safehaven was definitely more gloomy than I've seen in the range of a month.  There is simply a lot in the economy to be gloomy about.  Many of the posts were very worthwhile to read. 

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#2) On May 10, 2008 at 4:54 PM, MakeItSeven (31.73) wrote:

Very good article from Ty.

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#3) On May 10, 2008 at 5:31 PM, ATWDLimited (< 20) wrote:

All too true, the Banks are drowning in debt. This is all M3 growth, to finance things which the people they loaned it to could not repay them. As I have last calculated there is at least $3.82 in debt per dollar of M#, and the number has probably increased, with less and less actual GDP or GNP to back it up. The government is also a debt driven lender, so when the government begins to fell the squeeze, they will start sucking away your money, which will lead to a collapse. Either the system gets an overhaul or it withers away.

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#4) On May 10, 2008 at 5:56 PM, alstry (< 20) wrote:

Excellent observations by all.

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