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

August 12, 2008

U.S. Mortgage Defaults Spike

For some the United States has been dealing with high default rates in subprime and alt-a loan configurations. Now the U.S. economy and banking community has something to really fear with the increase of defaults in “prime” mortgages. There is an interesting wrinkle here.

The problem with prime mortgages is showing out in style for loans made in 2007. The default rate on 2007 prime mortgages is three times higher than loans made in 2006. This potentially dashes any hope that bankers had for prime mortgages as a stabilizing force to pull the economy out of the doldrums.

What is the cause for increasing prime mortgage failures? Did bankers hastily rush loans through in an effort to promote and heighten their own mortgage incomes? Could it be that many more 2007 home buyers were first time buyers or not as financially well-heeled, facing economic fallout from a faltering U.S. economy. In the next few weeks, better determinations are certain to be discovered.

Right now, the appearance is that increased defaults are simply a symptom of a greater economic malaise that is making inroads into an increasing number of households across the board. Bankers are now increasingly fearful of a long dark period of declining housing numbers, further threatening the banking and mortgage recovery and the recovery of the nation as a whole.

We’ve known for some time that the housing market has been ripe for a major adjustment. The continuing increase in mortgage default rates coupled with the downward U.S. economic spiral could see a much greater decline in home prices than has generally been considered. The rosy real estate projections that “anytime is a great time to buy a home” has likely been proved wrong, since declining house prices are a bust to the mortgage credit market.

Initially, the greater problem for the market is the decline in housing prices until they are low enough for buyers to become interested in buying again. How long that will take is anyone’s guess. With a contracting market, getting an affordable loan to buy a new home is becoming more and more difficult, putting increasing downward pressure on the market as a whole in a kind of self-fulfilling vicious cycle. The cycle will ultimately end, but planning for the economic carnage ahead remains the largest issue in the United States economy.

Many Americans have sold themselves into slavery to get a home that they hoped that they could afford. Bankers have sold themselves into slavery to their own devices, always hoping for a quick way out to make another quick buck. Nobody loves economic pain, but pain is the only way to grow past our collective economic ignorance. In many ways, both bankers and home buyers have reaped what they have sown, sometimes in the Biblical sense. Learning the lesson that life teaches will enrich America if the nation takes the lesson to heart. The Federal Reserve has not been quick to chastise bankers for a lack of financial literacy as the pseudo-governmental body seeks a collective middle ground. That is about to change. ~ E. Manning

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