Archive for the ‘Banking’ Category
From Jesse's Cafe Americain
These excerpts from the most recent TARP Congressional Oversight Panel Report make the risks in the US financial system abundantly clear.
Do you think that the Congress has the will and the ability to act on their recommendation, with the men currently in positions of power on the key Committees? Do you believe that the Obama Administration is capable of reforming itself and effecting genuine change with so many Wall Street denizens forming their policy?
"In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem."
We are persuaded that the government is waiting for the next wave of failures, or some exogenous event of catastrophic proportion, to provide their rationale to take new aggressive action.
But while the financial oligarchy is in control of the men in power, we doubt that these will be the right steps for the majority of Americans, the US economy, and its debt holders.
"There are a thousand hacking at the branches of evil to the one who is striking at the root."
Henry David Thoreau
Congressional Oversight Panel - August 11 Report - The Continued Risk of Troubled Assets
"...But, it is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today.
If the troubled assets held by banks prove to be worth less than their balance sheets currently indicate, the banks may be required to raise more capital. If the losses are severe enough, some financial institutions may be forced to cease operations. This means that the future performance of the economy and the performance of the underlying loans, as well as the method of valuation of the assets, are critical to the continued operation of the banks.
...If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.
...Part of the financial crisis was triggered by uncertainty about the value of banks' loan and securities portfolios. Changing accounting standards helped the banks temporarily by allowing them greater leeway in describing their assets, but it did not change the underlying problem. In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem. Treasury and relevant government agencies should work together to move financial institutions toward sufficient disclosure of the terms and volume of troubled assets on institutions‟ books so that markets can function more effectively. Finally, as noted above, Treasury must keep in mind the particular challenges facing small banks.
This crisis was years in the making, and it won‟t be resolved overnight. But we are now ten months into TARP, and troubled assets remain a substantial danger to the financial system....Nonetheless, financial stability remains at risk if the underlying problem of troubled assets remains unresolved."
The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.
No Comments »
by Mike Whitney
SilverBearCafe.com
(Editor's Note: In my estimation, fully 97% of the American population has already fallen victim, and succumb to the all pervasive, insidious misinformation campaign that has been waged on us for the past 100 years. This means all the energies you and I expend pleading with our family and friends to "wake up and open your eyes" is falling on deaf ears. I have finally realized that rather than wasting my time trying to wake them up, I need to concentrate my energies forging alliances with those of a like mind, a support group if you will. Given that 97% of the population is "in denial" and as a result have been rendered "mindless sheeple", we are left with 3%. That, happily, equates to 9,000,000 Americans who are searching for a support group as well. It is a hell of a lot more gratifying to discuss our plight with those who "get it" than those who not only don't, but to make matters worse, don't want to. If you don't know, that's ignorance. But you can fix ignorance. If your don't care, that's apathy. With a little nurturing that also can be fixed. If you don't want to know, however, that's stupid. And believe me, I have found that it is very hard to deal with stupid. - JSB)
Credit is not flowing. In fact, credit is contracting. That means things aren't getting better; they're getting worse. When credit contracts in a consumer-driven economy, bad things happen. Business investment drops, unemployment soars, earnings plunge, and GDP shrinks. The Fed has spent more than a trillion dollars trying to get consumers to start borrowing again, but without success. The country's credit engines are grinding to a halt.
Bernanke has increased excess reserves in the banking system by $800 billion, but lending is still slow. The banks are hoarding capital in order to deal with the losses from toxic assets, non performing loans, and a $3.5 trillion commercial real estate bubble that's following housing into the toilet. That's why the rate of bank failures is accelerating. 2010 will be even worse; the list is growing. It's a bloodbath.
The standards for conventional loans have gotten tougher while the pool of qualified credit-worthy borrowers has shrunk. That means less credit flowing into the system. The shadow banking system has been hobbled by the freeze in securitization and only provides a trifling portion of the credit needed to grow the economy. Bernanke's initiatives haven't made a bit of difference. Credit continues to shrivel.
The S&P 500 is up 50 percent from its March lows. The financials, retail, materials and industrials are leading the pack. It's a "Green Shoots" Bear market rally fueled by the Fed's Quantitative Easing (QE) which is forcing liquidity into the financial system and lifting equities. The same thing happened during the Great Depression. Stocks surged after 1929. Then the prevailing trend took hold and dragged the Dow down 89 percent from its earlier highs. The S&P's March lows will be tested before the recession is over. Systemwide deleveraging is ongoing. That won't change.
No one is fooled by the fireworks on Wall Street. Consumer confidence continues to plummet. Everyone knows things are bad. Everyone knows the media is lying. Credit is contracting; the economy's life's blood has slowed to a trickle. The economy is headed for a hard landing.
Bernanke has pulled out all the stops. He's lowered interest rates to zero, backstopped the entire financial system with $13 trillion, propped up insolvent financial institutions and monetized $1 trillion in mortgage-backed securities and US sovereign debt. Nothing has worked. Wages are falling, banks are cutting lines of credit, retirement savings have been slashed in half, and home equity losses continue to mount. Living standards can no longer be bandaged together with VISA or Diners Club cards. Household spending has to fit within one's salary. That's why retail, travel, home improvement, luxury items and hotels are all down double-digits. The easy money has dried up.
According to Bloomberg:
"Borrowing by U.S. consumers dropped in June for the fifth straight month as the unemployment rate rose, getting loans remained difficult and households put off major purchases. Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
A jobless rate near the highest in 26 years, stagnant wages and falling home values mean consumer spending... will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and unemployment is forecast to exceed 10 percent next year before retreating." (Bloomberg)
What a mess. The Fed has assumed near-dictatorial powers to fight a monster of its own making, and achieved nothing. The real economy is still dead in the water. Bernanke is not getting any traction from his zero-percent interest rates. His monetization program (QE) is just scaring off foreign creditors. On Friday, Marketwatch reported:
"The Federal Reserve will probably allow its $300 billion Treasury-buying program to end over the next six weeks as signs of a housing recovery prompt the central bank to unwind one its most aggressive and unusual interventions into financial markets, big bond dealers say."
Right. Does anyone believe the housing market is recovering? If so, please check out this chart and keep in mind that, in the first 6 months of 2009, there have already been 1.9 million foreclosures.
The Fed is abandoning the printing presses (presumably) because China told Geithner to stop printing money or they'd sell their US Treasuries. It's a wake-up call to Bernanke that the power is shifting from Washington to Beijing.
That puts Bernanke in a pickle. If he stops printing; interest rates will skyrocket, stocks will crash and housing prices will tumble. But if he continues QE, China will dump their Treasuries and the greenback will vanish in a poof of ...
No Comments »
A group of Federal Reserve friendly economists have launched a petition calling on the Executive Branch and Congress to not intefere with the Federal Reserve. Here's the full text of the petition:
Open Letter to Congress and the Executive Branch
Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.
First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.
Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.
If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.
It's hard to believe that it is actually economists that put this hazy letter together. They write:
..central bank independence has been shown to be essential for controlling inflation
Do they have any clue how much money was printed (i.e. monetary inflation) that caused the current boom/bust cycle? Do they have any clue how many dollars the Fed has printed that are being held by the Chinese, that the Chinese want to desperately get rid of?
They go on:
Second, lender of last resort decisions should not be politicized.
Is this a joke or what? Did Bernanke and Paulson not politicize the bailout process by allowing Lehman and Bear Stearns to crash, but bailed out Goldman Sachs (via AIG) to the tune of billions?
They continue:
The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountabilityThis group is clearly afraid of an audit of the Fed. How else can they possibly claim that the Fed is now transparent?
I really fear that any audit of the Fed may be co-opted by big governemnt types, but Ron Paul is clearly on to something. The Fed and their allies appear to be in full panic mode. What are they afraid Ron Paul will discover?
For the record, here are the creators and intial signers of the document:
Ricardo Caballero, Massachusetts Institute of Technology
Kenneth French, Dartmouth College
Robert Hall, Stanford University
Anil Kashyap, University of Chicago Booth School of Business
Pete Klenow, Stanford University
Frederic Mishkin, Columbia University
Thomas Sargent, New York University
Michael Woodford, Columbia University
Here are all who have signed the document:
Name Affiliation
1 Ricardo Caballero MIT
2 Kenneth French Dartmouth College
3 Robert Hall Stanford
4 Anil Kashyap Chicago Booth
5 Pete Klenow Stanford
6 Frederic Mishkin Columbia
7 Thomas Sargent NYU
8 Michael Woodford Columbia
9 Andrew Abel Wharton School, University of Pennsylvania
10 Daron Acemoglu MIT
11 Michael Adler Columiba University
12 Yacine Ait-Sahalia Princeton University
13 Fernando Alvarez University of Chicago
14 Scott Anderson Wells Fargo & Co.
15 Cliff Asness Managing and Founding Principal, AQR Capital Management LLC
16 Paul Asquith Massachusetts Institute of Technology
17 David Backus NYU
18 Dean Baim Pepperdine University/UCLA
19 Ravi Bansal Duke University
20 David Bates University of Iowa
21 Andrew Bernard Dartmouth College
22 Richard Berner Morgan Stanley
23 George Borts Brown University
24 Scott Brown Raymond James & Associates
25 Markus K. Brunnermeier Princeton University
26 Ralph C. Bryant Brookings Institution
27 Michael Carey Calyon Securities (USA) Inc. Credit Agricole Group
28 Christopher Carroll Johns Hopkins University
29 Martin Cherkes Columbia University
30 Diego Comin Harvard University
31 Jernej Copic UCLA
32 Dora Costa UCLA
33 Steven Davis University of Chicago Booth School of Business
34 Angus Deaton Princeton University
35 Davide Debortoli University of California, San Diego
36 Eddie Dekel Northwestern University
37 Harold Demsetz UCLA
38 Scott Desposato University of California, San Diego
39 Douglas Diamond University of Chicago Booth School of Business
40 Peter Diamond MIT
41 Francis X. Diebold University of Pennsylvania
42 Avinash Dixit Princeton University
43 Darrell Duffie Stanford
44 Pierre Collin Dufresne Columbia
45 Martin Eichenbaum Northwestern University
46 Andrea Eisfeldt Northwestern University Kellogg School of Management
47 Jeffrey Ely Northwestern University
48 Eduardo Engel Yale University
49 Eugene Fama University of Chicago Booth School of Business
50 Henry Farber Princeton University
51 Roger Farmer UCLA
52 Jon Faust Center for Financial Economics, Johns Hopkins U.
53 Michael Feroli J.P.Morgan
54 Wayne Ferson U.S.C.
55 Kristin Forbes MIT-Sloan School of Management
56 Mark Gertler New York Univiersity
57 Marc Giannoni Columbia University
58 Simon Gilchrist Boston University
59 Robert J. Gordon Northwestern University
60 Roger Gordon UCSD
61 David Greenlaw Morgan Stanley
62 Gene Grossman Princeton University
63 Steffen Habermalz Northwestern University
64 James Hamilton University of California, San Diego
65 Gary Hansen UCLA
66 Robert Hansen Tuck School, Dartmouth College
67 Gordon Hanson UC San Diego
68 Milton Harris University of Chicago Booth School of Business
69 Tarek Hassan University of Chicago Booth School of Business
70 Zhiguo He Chicago Booth
71 John Heaton University of Chicago
72 D. Lee Heavner Analysis Group, Inc.
73 Christian Hellwig UCLA
74 Gailen Hite Columbia Business School
75 Yael Hochberg Kellogg School of Management, Northwestern University
76 Stuart Hoffman PNC Financial Services Group
77 Bengt Holmstrom MIT
78 Bo Honore Princeton University
79 Peter Hooper Deutsche Bank
80 Takeo Hoshi University of California, San Diego
81 Christopher House University of Michigan
82 Peter Howitt Brown University
83 Chang-tai Hsieh University of Chicago
84 Ellen Hughes-Cromwick Chief Economist, Ford Motor Company
85 John Huizinga University of Chicago Booth School of Business
86 Erik Hurst University of Chicago Booth School of Business
87 Ravi Jagannathan Kellogg School of Management, Northwestern University
88 Dana Johnson Comerica Bank
89 Karen Johnson Federal Reserve Board of Governors (retired)
90 Charles I. Jones Stanford University, Graduate School of Business
91 Paul Joskow MIT
92 Matthew Kahn UCLA
93 Juno Kang The Bank of Korea
94 Steven Kaplan University of Chicago Booth School of Business
95 Bruce Kasman J.P. Morgan Chase
96 Peter Kenen Princeton Uniiversity
97 Ralph Koijen University of Chicago Booth School of Business
98 David ...
2 Comments »
U.S. Senator Mr. Jim DeMint is absolutely right. The Federal Reserve has been the tool of the aristocracy, bankers, in lowering the living standards of the working class. David Harvey has done some good work in researching this.
It is absolutley shameful, that the Democrats have fought Mr. DeMint in this way, however there is no doubt that if it were Republicans who were in the majority, it would be they, who would be doing the exact same. Whoever stated the Senate is owned by the banks, was absolutely right.
No Comments »
Antal E. Fekete
Professor of Money and Banking
San Francisco School of Economics
aefekete@hotmail.com
Our title is borrowed from a caption of the Chicago economist and monetary scientist Melchior Palyi (1892-1970) writing on the fiscal and monetary legerdemain of the U.S. government in his Bulletin #401, dated February 27, 1960, as follows.
Faking balance sheets legalized
A corporation publishing faked balance sheets would be barred from every stock exchange. It may even face criminal prosecution. The objective is to protect the public against fraud. But exactly the same fraudulent practice has been legalized in so far as commercial and savings banks, and life insurance companies are concerned. They can carry government bonds on their books at par value. A $1,000 bond may be quoted in the market at $800 or less; the balance sheet of your bank will still show it at $1,000. The purpose of this regulation, adopted by all federal and state supervisory agencies and by the Securities Exchange Commission as well, is to give those bonds a sacrosanct status and guarantee against paper losses. Thereby they are promoted to an absolutely safe and "liquid" status. The bank examiners count the bonds of the federal government, whatever their maturity and actual market price may be, as prime liquid assets, just like cash. The more bonds in the portfolio, the more liquid is the bank by the examiners' standards, - never mind the paper losses.
It is small wonder that the banks purchase long term federal obligations, thereby creating a market for them. The result is that with rising interest rates and declining values of medium- and long-term securities, the modest capital and undivided surplus of the banks - reserves against losses - are impaired. In the case of quite a few banks the entire capital and all reserves have been lost. In some cases, even a part of the deposits has been wiped out.
Silence of the Sea
But the public knows nothing about this sad situation. No newspaper dares to discuss it, or the preposterous practices of the govern-ment at the root of it. The "Silence of the Sea" covers them up. Those on the inside (and insight) hope and pray that a recession will reduce the pressures on the capital market, lower interest rates, raise bond prices, and wipe out the losses. Very likely it will; but what about the next cycle? And, above all, for how long, or how many times, will the depositors and savers permit themselves to be fooled and victimized? Sooner or later every legerdemain, however clever or subtle, is exposed - and backfires.
A further consequence is that the bond portfolio of the banks "freezes up". By selling bonds the bank would convert paper losses into real losses, which would skyrocket if major amounts were liquidated. While the boom and high interest rates obtain, the "prime liquidity" turns out to be the very opposite, unless the bonds are monetized at, and the losses shifted onto, the Federal Reserve. But the central bank can be relied upon to resist the "temptation" to absorb either or both.
The above was written in 1960. In 2009 we are wondering what has hit our banks. No mystery there. It was not sub-prime mortgages nor other loose lending practices. The banking crisis is entirely self-inflicted or, more precisely, government-inflicted the origins of which go back almost ninety years: faking balance sheets. That practice cannot go on forever. The day of reckoning comes when capital is called upon to do what it is supposed to do: to tie over the bank during a temporary setback. The kitty is opened, and found empty. Bank capital is gone, due to earlier legerdemain in trying to paper over paper losses. (No pun intended.)
The situation is actually worse, as far as the condition of our banks is concerned. So far deposits have not been affected during this crisis. Depositors feel secure in the belief that they are protected by the government and its deposit insurance scheme. Here is Palyi, writing in the same article on this subject:
Dumping ground for the federal debt
Government agencies that have no other choice in investing their funds, though they are not organs of the Treasury, are an obvious dumping ground for the debt of the federal government. A most interesting case in point is the Federal Deposit Insurance Corporation (FDIC). It sinks the "insurance" premiums paid by the banks into long-term government bonds, as a guaranty fund re-presenting less than 2 percent of "insured" deposits. The FDIC itself has brought out in its Report for 1957 that, in effect, deposit insurance is relevant only in the case of a banking crisis - in which case it would not be helpful at all. All its funds would be exhausted at once if a single one among the eight or ten biggest banks would get into trouble, to say nothing of a wide-spread bank-run. The public's impression is that the government guarantees deposits which it does not. Worse still, in order to make good on the "insurance" of even a small fraction of "insured" deposits, the FDIC would have to liquidate its own holdings that would break the bond market. Not only is this a phony arrangement which serves only to mislead the public, but it also induces the banks to neglect building up their capital accounts properly for the protection of the deposits. Rather, they rely on the "insurance" - and on their own holdings of government securities.
The hare-brained Geithner-plan
Now, 50 years later, we have a fully-fledged banking crisis on hand, and the FDIC will soon face its first real test since its establishment in the 1930's. Is deposit "insurance" a myth as suggested by Palyi, designed to mislead the public? There is plenty of evidence that it is. Why did the big Wall Street banks not sell government bonds from portfolio before begging Congress for bailout money? On the face of it this would have been a good time to sell, as the bonds are quoted above par value by the market, thanks to a ...
No Comments »
Recent Form Posts