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US Banking System Teetering on the Brink of Collapse

Stock-Markets / Financial Crash Feb 01, 2008 - 01:09 AM GMT

By: Mike_Whitney

Stock-Markets

Best Financial Markets Analysis ArticleSomebody goofed. When Fed chairman Ben Bernanke cut interest rates to 3% yesterday, the price of a new mortgage went up. How does that help the flagging housing industry?

About an hour after Bernanke made the announcement that the Fed Funds rate would be cut by 50 basis points the yield on the 30-year Treasury nudged up a tenth of a percent to 4.42%. The same thing happened to the 10 year Treasury which surged from a low of 3.28% to 3.73% in less than a week. That means that mortgages which are priced off long-term government bonds---will be going up, too.


Is that what Bernanke had in mind; to stick another dagger into the already-moribund real estate market?

The Fed sets short-term interest rates (The Fed Funds rate) but long-term rates are market-driven. So, when investors see slow growth and inflationary pressures building up; long-term rates start to rise. That's bad news for the housing market.

Now, here's the shocker: Bernanke KNEW that the price of a mortgage would increase if he slashed rates, but went ahead anyway.

How did he know?

Because 8 days ago, when he cut rates by 75 basis points, the ten-year didn't budge from its perch at 3.64%. It just shrugged it off the cuts as meaningless. But a couple days later, when Congress passed Bush's $150 "Stimulus Giveaway", the ten year spiked with a vengeance---up 20 basis points on the day. In other words, the bond market doesn't like inflation-generating government handouts.

So, why did Bernanke cut rates when he knew it would just add to the housing woes?

Some critics say that he just wanted to throw a lifeline to his fat-cat investor buddies on Wall Street by providing more liquidity for the markets. But that's not it, at all. The fact is, Bernanke had no choice. He's facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had. Just look at these graphs and you'll see what Bernanke saw before he decided to cut interest rates. http://benbittrolff.blogspot.com/2008/01/really-scary-fed-charts-why-bernanke.html

NEGATIVE BANK RESERVES ;

The banks are busted. 

In the first graph (Total borrowings of Depository Institutions from the Federal Reserve) shows that the banks are capital impaired" and borrowing at a rate unprecedented in history.

The second graph (Non borrowed reserves from of Depository Institutions) shows that the capital that the banks do have is quickly being depleted.

The third graph (Net Free or borrowed reserves of Depository Institutions) is best summed up by econo-blogger Mike Shedlock who says: Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending. Total reserves for two weeks ending January 16 are $39.98 billion. Inquiring minds are no doubt wondering where $40 billion came from. The answer is the Fed's Term Auction Facility. (Mish's Global Economic Trend Analysis; http://globaleconomicanalysis.blogspot.com/ ) So the only reserves they have is capital they borrowed from the Fed.

The fourth Fed graph illustrates the steep trajectory of the ever-expanding money supply. (Monetary base)

A careful review of these graphs should convince even the most hardened skeptic that the banking system is basically underwater and insolvent. We are entering uncharted waters. The sudden and shocking depletion of bank reserves is due to the huge losses inflicted by the meltdown in subprime loans and other similar structured investments.

HOW CAPITAL IS DESTROYED

When US homeowners default on their mortgages en-mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth, says economist Henry Liu.

The debt-securitization process is in a state of collapse. The market for structured investments�MBSs, CDOs, and Commercial Paper---has evaporated leaving the banks with astronomical losses. They are incapable of rolling over their their short-term debt or finding new revenue streams to buoy them through the hard times ahead. As the foreclosure-avalanche intensifies; bank collateral continues to be down-graded which is likely to trigger a wave of bank failures.

Henry Liu sums it up like this: Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value. (The Road to Hyperinflation, Henry Liu, Asia Times) It's a vicious cycle. The Fed is caught between the dual millstones of hyperinflation and mass defaults. There's no way out.

The pace at which money is currently being destroyed will greatly accelerate as trillions of dollars in derivatives are consumed in the flames of a falling market. As GDP shrinks from diminishing liquidity, the Fed will have to create more credit and the government will have to provide more fiscal stimulus. But in a deflationary environment; public attitudes towards spending quickly change and the pool of worthy loan applicants dries up. Even at 0% interest rates, Bernanke will be stymied by the unwillingness of under-capitalized banks to lend or over-extended consumers to borrow. He'll be frustrated in his effort to restart the sluggish consumer economy or stop the downward spiral. In fact, the slowdown has already begun and the trend is probably irreversible.

The financial markets are deteriorating at a faster pace than anyone could have imagined. Mega-billion dollar private equity deals have either been shelved or are unable to refinance. Asset-backed Commercial Paper (short-term notes backed by sketchy mortgage-backed collateral) has shrunk by $400 billion (one-third) since August. Also, the market for corporate bonds has fallen off a cliff in a matter of months. According to the Wall Street Journal, a paltry $850 million in high-yield debt has been issued for January, while in January 2007 that figure was $8.5 billion---ten times bigger. That's a hefty loss of revenue for the banks. How will they make it up?

Judging by the Fed's graphs; they won't!

Bernanke's rate cuts sent stocks climbing on Wall Street, yesterday, but by early afternoon the rally fizzled on news that Financial Guaranty, one of the nation's biggest bond insurers, would be downgraded. The Dow lost 37 points by the closing bell. 

The plight of other major bond insurers, MBIA and Ambac, could be known as early as today, but it is reasonable to expect that they will lose their Triple A rating. According to Bloomberg:

MBIA Inc, the world's largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guarantee. The insurer lost $2.3 billion in the fourth-quarter. Its downgrading from AAA will cripple its business and throw ratings on $652 billion of debt into doubt. Many of the investment banks have assets that will get a haircut.

The New York State Insurance Department tried to work out a bailout plan but the banks could not agree on the terms (ed note: "They don't have the money")

Bond insurers guarantee $2.4 trillion of debt combined and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report. (Bloomberg)

The bond insurers were working the same scam as the investment banks. They found a loophole in the law that allowed them to deal in the risky world of derivatives; and they dove in headfirst. They set up shell companies called transformers, (The same way the investment banks established SIVs; structured Investment Vehicles) which they used as off balance sheets operations where they sold "credit default swaps , which are derivative instruments where one party, for a fee, assumes the risk that a bond or loan will go bad. (The Bond Transformers, Wall Street Journal) The bond insurers have written about $100 billion of these swaps in the last few years. Now they're all blowing up at once.

Credit default swaps (CDS) have turned out to be a gold-mine for the bond insurers and they've given a boost to the banks too, by freeing up capital to use in other ventures. The banks profited on the interest rate difference between the CDOs (collateralized debt obligations) they bought and the payments they made to transformers...The banks sometimes booked profits UPFRONT on the streams of income they expected to receive. (WSJ)

Neat trick, eh? Who wouldn't want to enjoy the profit from a job before they've done a lick of work?

Even now that the whole swindle is beginning to unravel---and tens of billions of dollars are headed for the shredder---industry spokesmen still praise credit default swaps as  financial innovation. Go figure? 

POLITICIANS STILL GETTING THEIR MARCHING-ORDERS FROM WALL STREET

 The leaders of Europe's four largest economies (England, France, Germany, Italy) held a meeting this week where they discussed better ways to monitor the world's markets and banks. They did not, however, push to create a new regime of oversight, regulation and punitive action that would be directed at financial fraudsters and their structured Ponzi-scams. Politicians love to talk about greater transparency and watchdog agencies, but they have no stomach for establishing the hard-fast rules and independent policing organizations that are required to keep the carpetbaggers and financial hucksters from duping gullible investors out of their life savings. That is simply beyond their pay-grade. And that is why even now---when the world is facing the most serious financial crisis since the Great Depression�corporate toadies like British Prime Minister Gordon Brown merely reiterate the script prepared for them by their boardroom-paymasters:

If these agencies don't reform themselves, the Europeans would turn to regulatory response to enforce change.

Right-o, Gordon. Right-o.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

GodSend
01 Feb 08, 22:46
The Grand Depression (already in progress)

Well, Mike, that's an earful! Tell us, with Sorcerer Sir Alan Greenspan and his Apprentice Whirly Ben Bernanke renowned 'experts' on the Great Depression and certainly not your run-of-the-mill Economics Dummies, what were/are they 'up to' - or did someone put them 'up to' the annihilation of the American (perhaps Global) economy?

Sure looks from here like the deliberate actions of Zionists who are anxious to promote their "Greater Israel" PNAC plan (with however much blood, tears and treasure it will take) and burn our world to ashes, out of which they would like to create their New World Order!

Are you prepared to try to convince us that these are just 'bad but innocent decisions' by a bunch of clueless dodos?


Mark
02 Feb 08, 16:53
Man Shares Dream Of Economic Collapse!

March 26, 2007

Brother Bob

This took place last Thursday night – Friday morning. Now what are dates on that, Al? [That would be late on the 8th or early Friday morning on the 9th.] That’s correct. Because I was away. I was not even here (home). I was away to participate in a wedding. We had the rehearsal on Thursday evening, Friday we had off so the couple could take care of whatever prior to the wedding on Saturday. I think what precipitated this (revelation) was the fluctuating global stock markets.

I began to feel within myself, now that’s a personal feeling, nothing from the Father, or the Son, or the Holy Spirit; necessarily. It was just that very ugly feeling that something was not right. That something was amiss. And the dream began, seeing the international dateline with the sunrise coming up over the horizon. Now I don’t know exactly where that is out in the Pacific, but that was the perspective. It was being seen not from ground level, but slightly above the horizon, so that it could be seen coming up over the horizon. Does that make any sense? [Yeah sorta, you were up in the air… ]

And as the sun began to cross over the Pacific and reached the Japanese Isles there was this stunned shock, horror, of the Japanese investors and the Japanese people – which the stock market was plummeting... [That’s the Neiki.] OK.. [Was that our stock market or theirs?] Theirs! And staying ahead of the sun, so that it could be seen coming up over the horizon, the Lord began to show across the globe it reached the Chinese mainland, went into Hong Kong, came across the Asian markets, and it was like a domino effect.. The Chinese looked on in stunned horror.’ This cannot be happening!’

The Asian markets shuddered when it reached India. It was almost as if you could hear a pin drop. They could not believe what was happening, because they knew that the jobs that had migrated from the West were going to be gone. [Hummm] As it came across into the Arab producing oil nations, they looked at each other in absolute stunned horror. Some of them were taking their head wraps and burying their face in the head wraps, weeping and wailing as only Arabs can; and they were rocking from side to side.. In utter dismay, knowing that their oil prophets were plummeting. [So they’re seeing something but you haven’t told me what it is yet?] Uhh huh. [OK]

And as this come across into the Middle East, the Jewish people seemed to freeze in terror; knowing instinctively, that without really knowing what was taking place, that it was going to involve them, their nation, Jerusalem, and the potential for never again happening again. It swept across into Europe, and there was this sickening in their spirits, watching the economies of the world.. Now this was what the Father was showing. The economies were imploding/exploding inwardly.

As this came across Europe into England, and the nations of Wales and Scotland and Ireland and Iceland, and on over until it reached the shores of America, the world was waiting with baited breath. [Uhh huh] And. the people on Wall Street literally, they went to work that morning.. Now do you remember what the Father had shown years earlier about the stock market imploding and exploding at the same time? [No but..] Well, He showed as the horizon light came over Wall Street .. Are you familiar with when you want to send a message electronically so that it is sealed from enemy, so that it’s sent in a burst? [Yes, burst communications] You could have a great deal in info sent in a few seconds in this burst.. Well this is what the Father showed. I began to ask, ‘Father, what is this?’.

And in a moment of time He permitted what was shown over an extended period of time years ago about the stock market imploding and exploding at the same time – first. And I said, ‘Oh My God!! You have got to be kidding? Not now!’ Because the sense was, Al, that this was no longer going to be in the extended future, or intermediate future, this was coming upon us earlier and faster than anyone had ever imagined. Because there were those who were going to prepare for this. And as the bible says it would overtake them.

And in one hour all of their wealth would be worth nothing and they would throw their gold and silver into the streets. That is what the prophets say. [Have you explained what happened to this point?] Ahh, yes it’s coming. [But you’re gonna explain what we’re talking about?] Yes. And brother as this went on over America and Canada, Mexico, South America, and on towards the International Date Line, the same identical thing was taking place.

As the nations and peoples of the earth realized looking at all of this, but not really believing what they were seeing that the world’s economies were imploding and that all that they had amassed in the stock market, and that was connected with it, their lives were literally being imploded and exploded at the same time. Everything that they had was now worthless. In the midst of that it started in Japan..[Well, that’s how it works.] But the results started in Japan.]

The wealthy men, the super wealthy, began to take their lives. The middle class people they made runs on the banks. The middle class and the lower class people, they ran to the food stores and to the places where.. and this began to cascade.. The food stores were cleaned out. They went to the places that stored the foods for the food stores to have their stock transported to them; and raided those... [distribution centers!] OK, distribution centers. And from there they would go to the factories and take what they could. And from there they went to the farmers. And from there they went to the people who stocked food in their homes, and to where the food was being prepared to go to the manufacturers.

It went all the way down to the fields, Al. Stripping it bare like the bible speaks of the locusts and the different insects that would come afterwards and it was stripped bare and there’s nothing left on the land. [Hummm] Al, that precipitated the riots. It was literally every man and every woman and every child for themselves.

The feeling of fathers taking care of there families began to dissipate. Of mothers going and getting the food stocks for their children began to disappear. And when children see adults running rampant and wild-eyed and there’s nothing but chaos, them began to scream and howl not knowing what to do.

Now you picture that from Japan onward. Al, Japan was the first. They declared martial law. [Well something had to have happened the day before in America or Mexico that triggered the thing.] That was not shown. There was a sense as this day’s horizon began to creep across the globe, that there is something very, very, very wrong here.

And yet, a for instance when it reached China they knew what to do. I mean, they clamped down with a tight fist; the stranglehold of Communism. And as it creeped (sic) across the globe, there was with baited breath, ‘Will America hold?’

Now remember, the same scenario that was just said about Japan, with the people rising up in riot and the nation declaring martial law, and they were no… they went from using crowd control methods to deadly force. Shoot on sight. [That’s in Japan?] Uhh huh.. Now this was coming across the globe. Asia went mad! And there was a blood bath as nations began to lock down. When it reached the Arab world their thinking was ‘This is Allah’s judgment on the word for rejecting Islam’. Now they’re gathering their minds, ‘Should we or should we not launch?’

As this came across Israel they knew that the world was going to come for them. And they were set on the highest alert. Whatever that is in Israel. [The Jews in Israel. Right?] Still there? [Yes] As this came cross the unthinkable became reality; and was realized.

The Euro began to gain in strength; because, remember, then world’s economies at this point in time are still based on the dollar. So as these economies exploded/imploded it was seen as the strengthening of the Euro became disproportionately stronger. And Europe realized, ‘We may be able to weather this thing’.

When it reached America, when the same results that commenced in Japan, and spread across the entire Eastern Hemisphere, brother this was the gruesome reality. It was almost as if I were there, walking through this myself. [And the gruesome reality is???] Al, the president declared martial law. And realizing that this had been set in motion by something, or some things.. We’re going to call it the shadow governments – plural - of the N. W.O, they could not stop it!!

The rest of this testimony can be found at,

http://www.stevequayle.com/News.alert/07_Prophetic/070918.brother.bob3.html


alex
14 Oct 08, 07:07
People, keep it sane, please!

For goodness sake Godsend, Mike!

Try to keep some perspective. What we are witnessing is good old fashioned mass-greed in a reregulated market, not the working of some ludicrous conspiracy. (Are Icke's Reptile Gods to blame perhaps? Surely the very lack of evidence of their involvement is proof of their shadowy involvement etc etc repeat until you go paranoid-schizophrenic...)

It's happened before and it'll happen again. People + psychology + opportunity + MONEY = eventual chaos ;-)

alex


Raddy
27 Nov 08, 18:39
Response to People, keep it sane, please!

Honestly there is an underground plan to wipe out the US as we know it. This is when the North American Union and the Amero will be shoved down our throats. You may not appreciate Liberty but you will when it is gone.

DaddyBlogger


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