Tuesday, December 18, 2007

Staring in the abyss !!!

The collapse of the modern day banking system

Readers would be advised o digest every word of this article. The banks are staring in the abyss and worse is to come. The federal reserve and the BOE are jumping through hoops to try and stabalise the markets to no avail. Armegedon is staring everyone in the face.

Posted by doomberger @ 05:26 PM (851 views)
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6 thoughts on “Staring in the abyss !!!

  • I am no economist, but having read around the subject over the last week or so I can see that this article has hit every button. I was extremely worried before I read it but this has crystallised the position we are in for me.
    Google the 1929 depression and see what people went through. In those days people were used to hardship. Our soft society is not!! We will resort to the worst of behaviour to protect ourselves.
    I am now beyond wanting to see profiteers suffer, this is going to hurt everybody. I don’t want to see our society sink like this, but what else could happen? A soft landing?

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  • Thanks Doomberger.

    I found these two parts particularly interesting:

    “What’s so destructive about structured finance is that it allows the banks to create credit “out of thin air,” stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book, “New Monetarism,” which appeared in the Wall Street Journal: “The reason for the exponential growth in credit, but not in broad money, was simply that banks didn’t keep their loans on their books any more — and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they ‘securitized’ it and moved it off their balance sheet.”

    Then later on:

    “The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.”

    Does anybody know if this applies to the UK banking system as well? If so, we must find a way to stop this happening again in the future.

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  • japanese uncle says:

    Spencer said: “The Bank is staring into the abyss. The Financial Services Authority must go round and check that all banks are solvent, and then it should cut the Basel capital requirement level from 8pc to about 6pc.” [Call to Relax Basel Banking Rules, UK Telegraph]
    I say again, this ‘8%’ rule was hastily and arbitrarily introduced in 1988 clearly targeting the Japanese banks that were mostly operating with less than 8% capital ratio, but nearly monopolized global banking league table in those days. This newly introduced rule triggered a panic among them causing a severe credit crunch quite similar to the one unfolding in front of our eyes at the moment. The recession and deflation that followed is tormenting the economy to this day.

    Anyone who suggests the change of this rule must learn the meaning of ‘PLAY CRICKET’ and shut up.

    The most effective solution to the current problem is to create a super Central Fund by collecting/charging money from the investment bank officers and directors, brokers who missold mortgages, estate agents etc, that are collectively responsible for this mess, force them to refund the excessive salary and bonus and any other earning, say in excess of 100,000 pounds altogether ,say, on 10-year-retroactive basis. It is so clear that they are absolutely mediocre minds (except those who engineered this crisis by creating CDO geared to the subprime risks, fully aware what should follow; whereby making billions by shorting it; They must be sent to Guantanamo Bay and stay there for at least 30 years) who just followed the majority yet snatched (I would not say ‘earned’) huge salary and bonus undeservedly. They all must return those money and contribute them to this Central Fund, which will serve as the ultimate deep pocket to underpin the financial system, abating the systemic risk.

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  • Excellent article, summarising the situation thus far and charting some likely outcomes.

    @renting2, I don’t know about a 1930s-style depression, but at the very least we’ll enter a long period of credit-contraction and asset price deflation, like 1990s Japan.

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  • As the article says…..The economist Ludwig von Mises was more succinct in his analysis: “There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

    JU: I like your suggestion, however we do not have a fair society. The poor will suffer and the speculators will bathe in champagne.

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  • George Monsoon says:

    “So now monetary policy is totally impotent in dealing with the liquidity problems and the risks of runs on liquid liabilities of a large fraction of the financial system”

    In other words, interest rates and inflation manipulation are going to have absolutely no effect in averting a depression. The Cannon has been fired, we all heard the shot, now we are waiting for the shell to land and explode…!!

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