The Banks Family from 'The Fresh Prince of Bel Air'
Many people want to say that 2011 is starting to feel a lot like 2008. I disagree. I think its worse.
2008 came as a shock to many people. No one believed that credit markets could freeze the way they did, and that major financial institutions like AIG and Lehman could fail the way that they did. No one believed that AAA debt could turn illiquid, and that the entire derivatives universe could come crashing down. 2008 was all about disbelief.
After 3 years of living in denial, financial markets are beginning to come to terms with the fact that markets have ceased permanently to function. The only reason we made it around the corner into 2011 is because we have been hooked up to government sponsored lifesupport. Now people are starting to question the lifespan of the respirator…
Think about this for a moment please. After 3 years of close to 10% official unemployment, 0% interest rates, and exploding government deficits, we find ourselves, once again, on the precipice of a renewed contraction in global GDP. How is this possible? I thought central banks could prevent depressions?
If central banks could prevent depressions and save the banking system, then why is the index of five-year bank CDS’s now trading wider than during 2008? Why are three-month interbank lending rates for euros are at their highest levels since 2009? Why have yields on 10-year US treasury bonds dropped below 2% if official inflation is over 3%? Why is gold trading at near 1,900 dollars per ounce? Why is Bank of America laying off 3,500 workers? So many questions…
I believe that the banking system is largely bankrupt. How do I know? Well, let’s take the metaphor of a black hole. You can’t actually ever see a black hole because it doesn’t emit any light, but that doesn’t stop you from being able to detect its presence. The same way that you can detect a black hole in space – by observing its gravitational effects on nearby objects – so too can you detect a black hole in the banking system, by observing its effect on money and credit in the economy. When banks are bankrupt, their desire to lend is reduced and their desire to hoard cash is accelerated. The closer you venture towards the event horizon, the stronger the effect.
Permanent zero (the Fed’s determination to keep interest rates at 0% for at least the next 2 years) is just one of many signs that the banking sector is insolvent. Banks actually borrow money at a lower rate than what they can make by keeping that money at the Fed on deposit. That’s free money. And what about the fact that investors are willing to loan their money to the US government at 2% every year for the next 10 years when official price inflation comes in well above that at 3.6%. And lastly, let’s not forget that the FDIC continues to insure all non-interest bearing deposits, regardless of the balance of the account and the ownership capacity of the funds for at least another 16 months. That’s unlimited coverage. Why, oh why?
Again, the answer to all of these questions is that the banks are bankrupt, and the only thing keeping them, the financial markets, and the rest of the economy alive is government sponsored life support, primarily through special loan facilities, central bank interventions, and fiscal spending up the ying-yang. The markets know this, but they have been willing to play along for the past three years because they figured the government could keep things from falling apart. Well, now it seems that the markets are starting to question the intelligence and resolve of their “public servants,” who are appearing themselves, more bankrupt by the minute. The only difference here is that politicians don’t go broke from lack of financial capital. They go broke from lack of political capital, and as people around the western world begin to catch onto this ponzi scheme of collusion between governments and banks, the ease with which these cleptocrats have been able to perpetuate their fraud is coming under sever constraints.
The only question that remains for me is, what is going to be the spark that is going to start the next bank panic, and what will governments do then?
