Right Now, Propping Up the Banks Is the Only Thing

"G-7 Leaders Agree on Principles To Confront Crisis, but No Joint Plan," The Wall Street Journal, October 11, 2008

Right now restoration of financial confidence isn't everything. It's the only thing. So for the time being, we can forget about Troopergate, hecklers at McCain rallies and the latest opinion polls. Nobody cared about Gary Condit's love life on the morning of 9/11.

Time is of the essence. This week, hopefully before markets open in Asia on Sunday (New York time), our government must announce a plan similar to that being enacted in Britain, where, for a temporary period, all bank deposits will be insured by the government.

Banks don't just rely on federally insured deposits from people like you and me. Of the $7 trillion in U.S. domestic bank deposits, measured on June 30, 2008, about $2.5 trillion did not benefit from FDIC insurance. After the bump in the individual FDIC insurance limit to $250,000, close to $2 trillion in deposits remain uninsured. Most of that $2 trillion represents inter-bank loans used to make the system work.

Think about it. Corporations manage their cash through banks. When you pay your AT&T bill or your American Express bill, the money received by those corporations is collected by banks and wire transferred to other banks. For banks to be able to balance out their books at the end of each day, they need to rely on their relationships with other banks with which they often have corresponding balances. (When you leave a deposit with a bank, you're effectively lending that bank money.)

Right now, banks have all but stopped lending to one another because in this environment, they don't know which institution will face another liquidity crisis. This virtual shutdown in the inter-bank lending market can cause a panic that spirals out of control.

And the loss of confidence in banks quickly spreads to the rest to the economy. AT&T has trouble accessing the commercial paper market, which has shrunk by 20% in the past month. The corporate bond market has been virtually shut down for over a month. (The crisis began when Lehman was allowed to fail.)

I'll bet many people are offended by the idea extending further support to the banks. Why should we bail out the people and banks who got us in this mess? For the same reason that de-Baathification didn't work. Once you allow the whole system to become unraveled, then the damage is irreparable and it is far more difficult to create order out of chaos. There will be plenty of time to extract a pound of flesh from the responsible parties.

Comments

[Mover]

While I believe that the federal government needs to do something, I don' t believe that ensuring the those who make the mistakes, and those that coerced them into doing it, should get a pass along with billions of taxpayers’ dollars.

The underlying problem needs to be addressed first. And that problem was the taxpayers representatives that coerced banks into giving credit to people that were unable to pay it back, then hiding the bad decision by selling the "secured" loan to an investment company and having the entire mess guaranteed by you and me (Fannie May & Freddie Mac).

What should happen is first, replace all members of the US Congress who helped the Fannie and Freddie meltdown. 33 Senators and all US Representatives are up for (re) election this year.

Then, arrest and try the executives that caused this mess, along with those government officials that received money from Fannie and Freddie and helped it get where it is today. Get all of those golden parachutes back.

Next, a new law that says a home that is a residence cannot be repossessed, with only a few exceptions. If a problem comes up, the financial institution that gave the loan should tough it out until the homeowner can pay or refinance for a longer term (to lower payments). If the financial institution can show that a buyer’s credit rating isn’t good enough for this kind of system should not grant the loan.

[jhNY]

'Financial confidence' is a euphemism for belief in bullshit. It's the weakest part of the flim flam. Once the mark gets wind of the set-up, he freezes up and won't part with his cash, unless clubbed into cooperation (see recent bail-out).

And the for financiers of all sizes the big mystery to solve is: once the bullshit is known to be bullshit, how long before it sounds credible to the mark again?

Look at stock market activity between 1931 and 1971. First thing you notice is how lonesome the boards look, minus all the money pledged to fate by ordinary Americans. Because in those years, too many still lived who remembered how all the financial geniuses of the last great age of the entrepreneur as local god were proved to be the front on a confidence game, the object of which was to part mark from money.

On the other hand, loss of faith in bullshit is so contagious that when it happens, the financiers themselves are swept along and suddenly find themselves agnostics at best, and in no mood to believe in anybody's balance sheet, knowing what they know about their own.

[dadw5boys]

NO MATTER WHAT THEY DO !!!!!!!

WE CAN NOT LET THEM GO AFTER THE GOLD AND SLIVER IN FORT KNOX !!!!!!!!

IF BUSH GOES AFTER THE GOLD AND SILVER IN FORT KNOX HE BANKRUPTS THE COUNTRY !!!!!!

[Aaror]

um,
First, please ditch the all caps, it just hurts people's eyes and discourages them from reading your post.
Second, the gold (not any silver) is only worth a fraction of the value of the dollars in circulation. Most of the value of a dollar is based on a combination of the value of government assets, people's belief in the dollar, and foreign government's desire to have the dollar worth more than their currencies.
As for Bankruptcy, we could make a good case for the US declaring bankruptcy right now. We make 3 trillion dollars a year (the federal gov't) and owe 10 trillion. That is just like a person with a $50,000 a year income owing $166,000 on credit cards.
The US gold reserves are more for psychological benefit more than value. Oh, and don't forget that there is more gold in the vault under New York City than in Fort Knox...

[jsarets]

That ship has sailed, unfortunately. Contrary to the conspiracy theory, there does appear to be gold in Fort Knox. But the most optimistic estimate is that there is only about $135 billion worth of gold in there, and 80% or more could be foreign deposits.

The fact of the matter is that the IMF owns more than two-thirds of the world's gold. As has happened repeatedly throughout history, adopting a gold standard would rapidly bankrupt our economy and transfer wealth to the private owners of international banking interests.

Money is whatever we agree to accept as money. It doesn't have to represent a valuable commodity in order to have a stable value, and it's highly desirable that it doesn't. The trick is that a fiat currency can only be credible if loans denominated in that currency are backed by an equal amount of deposits on reserve.

The reason why our existing fiat currency systems are teetering on the edge of collapse is because outstanding loans in these currencies exceed deposits by orders of magnitude. It is plainly obvious that the debt can never be repaid because there isn't even close to enough money in existence to do so. That's the problem.

[Rule Of Law]

And the IMF and World Bank are meeting right now, according to Fiderer, and figuring out how to get the rest. We've become a 3rd world country on the order of Uganda, fit only for pillaging by the international financial combine.

[jsarets]

(page 1/2)

Propping up the banks is the thing, but its not the only thing. This isn't just a banking crisis. This isn't just a mortgage crisis. This is a money crisis. That's why people don't understand what's happening. We understand income and expenses, savings and loans, even stocks and bonds. But hardly anybody understands money and its dirty little secret.

Money is debt. Every dollar in circulation was conjured out of nothing in exchange for a promise to pay it back plus interest. We can have as much money as we can borrow with virtually no limit. If we could pay down the debt, then there would be no money at all. But we can't pay down the debt, because only the principal was loaned into the economy, so there isn't enough money in existence to pay the interest.

If people understood that banks charge interest on money they create out of nothing and enslave humanity under exponentially deepening and fundamentally inescapable debt while they foreclose on everything we own -- then we would also understand that the question of whether we bail out the banks is far less important than whether we pay for it using more interest-bearing debt money.

(continued)

[jsarets]

(page 2/2)

I believe we should pay down almost the entire national debt, public and private, within 2 years using interest-free Treasury notes as sanctioned by Article I Section 8 of the Constitution while the required reserve ratio for all banks is proportionally increased to 100%. This results in zero inflation while reducing outstanding debt to the amount of deposits on reserve.

The resulting monetary system wouldn't require unsustainable growth and consumption. It wouldn't be subject to scarce commodities like gold or petroleum that are too easily cornered and manipulated. And it wouldn't allow banks to profit from the virtually limitless creation of new money. Banks would profit only from the difference in interest rates on equal amounts of loans and deposits.

Sure, bail out the banks. But do so in a way that fixes the scandalous money crisis -- for good.

[Rule Of Law]

The best way to fix is js, is to eliminate the FED, do away with fractional banking, give the power to make and set the rates on our money back to the people and their reps in Congress. And make it a Constitution amendment.

The fact is that the leverage on the debts these banks and investment houses have run up is in the hundreds of trillions of dollars. More Money than Exists in the entire world--and it's all make believe, a house of cards that could be wiped out with the stroke of a key on a computer. That's how fractional banking works. No money is actually created. You couldn't go and see it if you even knew where to look. It's a game played with numbers. I give you 10 dollars, you call it 100, and were off to the races. This must end.

So here's a thought: Since no actual money exchanged hands any where along the pipeline of exploding debt that the banks created, why don't we just unwind those deals in reverse? Go back to before the creation of these "derivatives" and "CDO's" and the whole securitized pyramid scheme. They played the game with money that never existed. So the debts they scream about are just as unreal. Let's get back to reality, shut down the gambling tables on Wall Street and stop expecting the taxpayer to put up real money earned by real work for fake debts.

[jsarets]

I agree completely. My proposal eliminates the Fed, does away with fractional reserve banking, and restores the power of monetary regulation to the people. A Constitutional amendment is not strictly necessary, since all the authority we need is already there. The Fed operates under a Congressional charter. All we need to do is revoke the charter.

Furthermore, by wiping out all debt with the issuance of new currency to replace the old, we essentially reboot the entire web of debts in the global economy. Everybody's debts are retired and all of the creditors are happy. So instead of rewinding decades of transactions, we fast-forward to the end of the movie. Everybody lives happily ever after, including the characters that were killed off in the dramatic climax we skipped.

[francoise]

I agree with you : bank deposits and inter-bank lendings have to be guaranteed by governments.

However, can these governmental guarantees be trusted ?

If my government was as wealthy as the governments of China or Abu Dhabi, I might feel safe.

But your and my governments are indebted to the point of having to borrow money from foreigners just to pay for the interests of the debt.

I can't really see how these two insolvent governments can be considered as reliable when guaranteeing their banks' solvency.

And their banks' solvency is rightfully distrusted : how many assets are made of toxic derivatives that will go from profits to losses ?

If losses happen (GolmanSachs predicted two thousand billions of losses in the subprime mortgages, the economist Patrick Artus predicted fifty thousand billions) then your and my governments will have to borrow more money from foreigners.

However these foreigners might have some national issues to deal with. The Chinese assembly lines and the Saudi oil pumps aren't running as fast as they used to. Recession is global.

What if foreigners can't afford to lend us money ?

What if all this amount of value that has been created under the form of RMBSs, CMBSs, CDOs, CCOs, CFOs, CFXOs, has been overvalued and is more important than the real volume of wealth and money that exists around the world ?

[SamEllison]

Gordon Brown has become a hero almost overnight.

[AmigoDelNorte]

People should not have confidence in what banks have become. People should not have confidence in the stock market. People should not have confidence in insurance companies. What we have now are multidisciplinary multinational corporations that make money playing games with money. And when they lose, they play a game of chicken with us to try to squeeze money from us through taxes, too? No way, no more. Let them fail.

The stock market is not the optimal vehicle for investing in business. It's time we invest directly in businesses that produce goods and services. With internet and database technology, businesses can manage direct investment. Investors can choose the ones that are transparent.

Banks should be left to basic banking functions of safely holding money and facilitating transfers to and among customers. What banks have become is not worth saving.

[ajax2]

Bush On Financial Crisis: "It's A Good Thing I'm In Charge"

Isn't this enough?

[barnybilt]

Yes! to prop up the banks is very important but doing that without added controls is a recipe for more of the same. Your saying that letting them get back to doing what they have been doing is what will solve all our problems. If you just give them money will they start loaning it out as you expect, or will they use it to cover their bottoms on bad obligations? Giving a floating man a life preserver expecting him to loan it to another floating man hoping that man will repay the favor later is stupid. We need strick rules and controls passed and agreed to before the money is passed out.
All the talk of how to save it by what we think of as smart men, has been stupid. The problem is there is a crisis of cash not flowing and the way to make cash flow is to put cash into the economy. People could pay those mortgages if they were making money and money would be flowing through those banks.
I call for equil money, if the Government can afford to spend 800 billion to prop up the people who caused the problem, they can also afford to put equil money into the country.

[Poboy]

I disagree.

The government should not bailout these banks. They must be allowed to fail. Is this free enterprise?

I'll go one step further. The banks WILL most likely FAIL. The derivatives are nothing but paper, with no value, and there are just too many of them from what I can tell (the estimates are $60 Trillion to about $200 Trillion, unless we treat them like dollars.) No one knows, which is essentially the most dangerous aspect to all this.

The only question is this:

Will we allow the banks to take down the US government with them?

[Poboy]

In addition, by proping up the bad, inefficient banks, we are stopping the good, efficient banks from growing.

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/11/AR2008101102228.html?hpid=topnews

[tompoe]

Then again, the key step just might be a moratorium on foreclosures. Oh, but, that helps no one on Wall Street. Aah, I see. Well, David, may I remind you, on September 19, 2008, Paulson demanded entitlement to the tune of $1 trillion for Bush's going away present for his cronies. That's the day the RNC admitted they're the Party of Corporate Welfare. America does not tolerate corporate welfare. Maybe this is a good time to remind those who call themselves Republicans, they belong to the Party of Corporate Welfare. So, can we now announce the moratorium on foreclosures, and move forward? The Court can sort out the crooks from the crooks, starting with those who flew off to their "retreat" after Lehman failed.

[Jim Pivonka - Huffpost Blogger]

Thaks for this post, one of the more realistic and clear I have seen on the topic. I especially like the last paragraph.

I too hope that this action is taken before the time you describe, and that arrangements for funding the costs of this additional "insurance" by charges to participating institutions can be made later, in a way that does not impair the immediate benefit which is so important.

[David Fiderer - Huffpost Blogger]

Thanks Jim

[StevieRae]

Many lobbyists and banks pushed back against a direct investment vs the gov't establishing some value of these "toxic" assets and essentially gambling with taxpayers' money.

England showed the way and now we're pursuing the much better option: direct equity interest in the major banks thus allowing the banks to have additional cash flow but assume responsibility for selling these assets.

It's a much better deal of a horrible condition. I'd like to know inserted the ambiguous wording in the 212 page rescue bill, which is allowing Treasury to pursue this option. He/she/they should be commended!

[Jim Pivonka - Huffpost Blogger]

I think it's unfortunately indicative of the quality of media reporting on the bill that this "ambiguity" or provision for this kind of direct injection of capital was not mentioned in any of the reports that I saw until Treasury began discussing taking the action. It may have been mentioned somewhere, but I was watching the reporting on that package fairly carefully and did not see any analysis which suggested that this authority was there either explicitely or implicitly.

What are specialist financial reporting services for, if not to do this kind of analysis and inform us of the results? It is no wonder that bloggers are displacing the normal media channels, if they cannot do any better than they have done on this issue.

It seems the normal media channel is nearly as bad in rporting financial news as science news.

[burndtdan]

But could bloggers try to explain it to me in terms of giant dominoes or in a cartoon?

I THINK NOT!