Busted: Bankers and The Global Economy

August 13, 2008

Federal Reserve Loans Not Working

The U.S. economy has seen the Federal Reserve System bail out banking for the last 9 months with very little to show for its efforts. Commercial banks have been involved in a national interbank liquidity freeze, reluctant to lend to each other since the credit squeeze started last year. While the reason isn’t readily discussed by most venues, shady and fraudulent banking instruments designed to make money is the reason for the interbank lending crisis. Banks simply don’t want to get stuck with other banks bad debt and securities. The cancer of bad securities is touching most commercial banks profoundly. Bank capital is tied up for everyone as a result, making credit access to firms and individuals difficult.

Credit auctions continue to be overbid for amounts often doubling available credit from the Fed. There are consistently more bidding institutions than available credit funds. 64 bidders sought $54.8 billion out of 25 billion available from the Fed in a recent auction. In a new stretch, the Fed and Global Central Bankers ( G8 ) are extending limited credit for 84 days instead of the traditional 25 day credit leash.

The 84 day Fed credit wasn’t enough to meet demand, so the Fed is ramping up for another standard banking auction so that commercial bankers can continue to bolster solvency levels. Banking reputations have been thoroughly smeared as even Swiss Bankers have been involved with billions in bad securities. Bank shareholders have been hit hard because bankers went with the natural flow of high-profits banking based on securities fever. The bleeding from subprime and now prime loans continue to erode the profitability of bankers, despite the fact that bankers have the power of the fractional reserve. Unfortunately, in tough times, even the fractional reserve has a way of biting back since banks have minimum financing standards for solvency. This is currently the battle that many U.S. banks are now facing.

uneasy banking alliance?

changing balance of power

In the words of the BBC there are few winners. “The financial turmoil has proved poison for policymakers dealing with it, it has provided rare meat for economists, commentators and opposition politicians.” The cash crisis in banking has driven the growth of sovereign wealth funds, giving insurance and pension entities a place to invest more of their colossal wealth in corporate assets.

Bankers have been grateful for the huge infusion of cash (credit) from foreign powers to cover their skyrocketing losses. The reality in many cases is that bankers are literally giving up the bank to outside foreign politics in order stay operational. The balance of power in the world is changing. The Federal Reserve has had little recent effect outside of pacifier value and confidence building. ~ E. Manning

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