In the wake of last fall's $700 billion taxpayer-funded bailout of the financial and banking sector, the so-called TARP program, the decision makers in Washington have been engaging in a fiscal masquerade. The objective: convince the public that America's banks, with balance sheets choking on toxic assets, are actually well-capitalized and secure. This, despite clear evidence that at least $2 trillion in additional funding would be needed to clean up the nation's problem banks. To convince U.S. citizens and global investors that all is well with the American banking system, Treasury Secretary Timothy Geithner concocted misnamed "stress tests" to demonstrate the fiscal health of the country's banks. Not surprisingly, the major banks "passed" the Geithner test, for the most part with flying colors. My readers will recall that I labeled the Geithner stress test a fraudulent exercise in deception. Now, it is reality that is casting its impartial verdict.
The Federal Deposit Insurance Corporation (FDIC), over the past few days, closed several banks, including Alabama based Colonial Bank. This institution, with $25 billion in assets, represents the 6th largest bank failure in American history. So far, 2009 has witnessed 77 bank failures in the United States. In all of 2008, the year that the banking crisis exploded, 35 banks were shut down by the FDIC, and only 3 in 2007.
With the number of bank failures accelerating, and running far ahead of last year's pace, it is preposterous to conclude that the U.S. banking sector is well capitalized and strong enough to endure a severe economic recession. Yet, that is exactly the fantasy world the key economic policymakers in the Obama administration are beckoning us to embrace.
This problem of cognitive dissonance is not a uniquely American one, however. In Western Europe there is a numbing resistance to understating how vulnerable that region's banks are to the disastrous and worsening economic situation in Eastern Europe. As with America and the UK, former Soviet bloc countries have suffered a severe contraction in home prices. In addition, many East European home-buyers obtained their mortgages from banks located in Germany, Italy, Austria and other parts of Western Europe. The loans were structured in euros, and now virtually all the national currencies in Eastern Europe have severely declined in value in relation to the euro. The results is a wave of mortgage defaults, which are eroding balance sheets throughout the European banking system.
Action speaks louder than words. Economic realities in the United States, Eurozone and UK, and the multiplication of bank failures in America, point to the futility of trying to pretend a problem does not exist, then converting that ignorance into a solution. Just as the political decision makers lost control over the financial system in 2008, they seem headed down the same path now, having failed to learn from their recent mistakes, which have already inflicted such a fearful cost on the global economy.