Banks are lending — NOT

The theory was beautiful (well in the abstract)…

Give troubled banks more credit and they will lend it out and the economy will stop its free-fall.  Now, that sounds like utopia to me.  Create credit and we will all be saved for unemployement, slowing production, decreased consumer spending, and rising interest rates.

HOLD ON… let’s put a toe back on the plane of reality…

Banks aren’t lending much more than before eventhough they are being handed gobs of cash.  Why wouldn’t banks lend out free money?

What if…

  1. there aren’t any borrowers worthy of getting loans? — Let’s say during a recession!  Oh right the economy slows WAY… DOWN.
  2. there are more troubled banks and unknowns on banks balance sheets.
  3. banks are holding the cash knowing full well that there is another storm on the horizon

I didn’t pull this out of thin air like the Fed does with money.  An article in the NY Times starts with

The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

Sorry Paulson your plan isn’t working.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Again banks don’t want to lend into a very uncertain future.  They want confidence in the economy — there isn’t any and the opposite is occurring.  People are spending less as they become more concerned about the safety of their jobs.  Most Americans have no savings cushion to fall back on.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

Wait a minute… all that money being put into the system to restore confidence and spur lending may just vanish?  So at the end of the day more banks fail, the economy continues to contract, available credit continues to contract, unemployment rises, and interest rates eventually rise.  This isn’t what Paulson sold to us with his bailout plan.  Were we duped?

Nah, the individuals responsible for the government’s actions are always in need of votes and making a horrible situation look not so bad or at least feasible to fix.  At the end of the day our failed bailouts will have a disastrous effect.  The consequences are a HUGE debt burden, a larger interest payment on that debt, the world losing confidence in the value of the dollar, and a prolonged recession probably followed by major inflation.  I’ve been singing this song for a while and it will take time to play out, but as you can see this is a VERY rocky road.

Force FED chickens…

Ironic that WaMu’s collapse happens to coincide perfectly with this bailout proposal trying to be hurriedly pushed through Congress.  It will for sure pass now <that was my take last night><now we are seeing major hiccups in the process (thankfully)>.  We have been sold out by various individuals in the United States Government.  Very unfortunate indeed, and some say the greatest looting operation ever in history.  Mark my word it isn’t over and will continue to spread to regional banks.  I find it interesting that Goldman Sachs and JP Morgan are the golden children in this whole mess, not to mention that Paulson used to be CEO of Goldman.  Coincidence?

In the EXTREME case you are going to want to have food and water on hand.  A decent supply.  I don’t know if it will get to that, but there is a lot of uncertainty in people’s minds.  When they are fearful they do stupid things.  Besides it never hurts to be prepared for an earthquake. I’m concerned about a run on the dollar starting abroad than at home.

Yes, I realize I sound like a doomsdayer, but  I’m just taking a pragmatic approach to the whole thing.  Show me some good news in this mess and I might be willing to alter my view slightly.
Has it occurred to you that we were fed the same crap with respect to going into Iraq about weapons of mass destruction?  This administration has been credited with being stupid, but I’m starting to wonder if that was all a line.  They have systematically destroyed the dollar, taken us to a never ending war – Iraq, allowed the credit bubble to get as big as it did, and in the end who gets to pay the bill?   The taxpayer.

And I’ll now step off my soapbox :)

-T

And don’t forget about Voltaire!

“Paper money eventually returns to its intrinsic value – zero”

~ Voltaire – 1729

From turmoil to manipulation to control

TURMOIL, FEAR, CRISIS, PANIC, COLLAPSE, SAVING THE ECONOMY, BAILOUT, CONTROL… Notice the progression from left to right.  A few bumps in the road lead to an eventual bailout with control obtained due to matters rushed in a state of panic.  Do people act rationally when they are paniced?  NO  Generally, they look for a solution.  Someone to come along and say “follow me”  I know the way!  This is exactly what is happening with the proposed bailout plan that is thankfully hitting a few speed bumps.  However, Bernake, Paulson, and the Bush administration want to see it passed immediately.

Bloomberg article:    (Emphasis in bold mine)

“I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover,” Bernanke told the Senate Banking Committee today. “My interest is solely for the strength and recovery of the U.S. economy.”

Lawmakers have balked at rubber-stamping the Treasury plan to remove illiquid assets from the banking system, with Democrats demanding it support homeowners and limit executive pay, and Republicans resisting the plan’s reach and size.

Bernanke, putting aside his prepared remarks released earlier today, said the Treasury should buy illiquid assets at “hold-to-maturity” values rather than at discounted “fire- sale” prices. The suspension of “mark-to-market” accounting for assets, a change backed by “many banks,” would instead hurt investor confidence.

Let’s get this straight… Markets in turmoil, unknown amount of worthless assets, the banks don’t want to write them off because it will show up on their books, they will need more cash on hand once the bad debt is written off, which they don’t have, Bernake and Paulson want to push this though ASAP, Bernake and Paulson want to pay the HTM (Held to Maturity cost), and not a discounted price.  That is essentially paying for a salvaged car at the price it cost when new and in the showroom.  THIS IS NOT GOOD

HTM securities are those the investor intends to hold to maturity and is able to hold to maturity. Designation of a security as HTM allows the investor to report the security value at historical cost plus accretion or minus amortization. Unrealized gains or losses are not shown on the balance sheet, reflected in reported income, or reflected in reported net worth. 

What I want to know is what we aren’t seeing.  We have a bill trying to be pushed though Congress at a very rapid pace.  Lawmakers are being asked to assume at a minimum $700 billion worth of debt obligations that nobody knows the value of.  No bank in the world or private institution would consider doing such a thing.  However, the rules change when you say that it is in the taxpayer’s best interest in “saving” the economy, but behind the taxpayer’s back you are reaching into their pocket and pulling out hard earned cash.