Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

True Cost of This Global Banking Crisis

Stock-Markets / Credit Crisis 2008 Mar 12, 2008 - 06:05 PM GMT

By: Adrian_Ash

Stock-Markets

Best Financial Markets Analysis Article"...If only the big central banks would sit on their hands and let this crisis work out, they could save Western taxpayers up to 98% of the potential mopping-up costs..."

HOW TO KEEP YOUR HEAD when all about you are losing theirs?


"Steer clear of the new gold rush," urges Jason Zweig, a senior columnist at Money Magazine .

"Don't give in," says Janice Revell, another senior hack at CNN's glossy monthly. "Step out of the stock market, even temporarily, and you may miss the whole point of owning stocks."

"Aw, just lend! Lend! LEND!" screams the Federal Reserve. Sporting its usual crystal-meth grimace, it's stumping up $200 billion in Treasury bills for desperate New York brokers to kick-start the world's capital markets. And now they can use flakey mortgage-backed bonds as collateral.

Stepping in "to address liquidity pressures" like this – and getting your chums at all the other top central banks to do the same – looks the next-best thing to buying mortgage-backed bonds altogether. But while central banks don't surely want to become "home buyer of last resort", it's got to be better than doing nothing. Right?

Acting early and often must work out cheaper in the end. Mustn't it?

Well you'll never guess what. As anyone who ever fell for interest-free vendor financing knows only too well, the cheapest option – always and everywhere – is to avoid spending any money at all.

As a professional economist would put it, "we find no evidence that accommodating policies reduce fiscal costs." That's how two senior economists at the World Bank put it in a 2002 report studying 30 years of systemic banking crises across 94 countries.

Borderline crises hit 44 nations. And on average, the World Bank economists found, "governments spent an average of nearly 13% of GDP cleaning up their financial systems" as a result of the bail-out programs they tried to implement.

"Indeed, each of the accommodating measures examined," they continued – citing "open-ended liquidity support, blanket deposit guarantees, regulatory forbearance, repeated (and thus initially inadequate or partial) recapitalizations, and debtor bail-out schemes – appears to significantly increase the costs of banking crises."

Weird like pineapple on pizza, don't you think? Because the seven central banks jumping to hit the "panic button" this week are all members of the World Bank. They actually helped found it back in 1944. More than that, the central banks led by Ben Bernanke, Jean-Claude Trichet, Mervyn King and the rest all figure in this 2002 report.

All except the Swiss National Bank, that is...

#1 S&L U.S.A: The slow-motion savings & loan collapse in the United States destroyed some 1,400 institutions and took another 1,300 banks with it between 1984 and 1991. Direct cost to the US taxpayer? Some $180 billion, or 3% of annual economic output.

#2 Europe 's Bad Banks: Staff at the European Central Bank might like to recall the Greek and Italian bail-outs of the early 1990s...or the $10 billion failure of France 's Credit Lyonnais in 1995...or Germany 's giro-bank crisis in the mid-70s?

#3 Japan 's Lost Decade: The 1996 rescue of Japan 's zombie banks cost more than $100 billion in public funds. Two years later, the Obuchi Plan spent another $500bn of taxpayers' money – some 12% of Japan 's GDP – on loan losses, bank recapitalizations and depositor protection.

#4 The UK's Repeat Failures: From the "second line" crisis of the mid-1970s to the collapse of Johnson Matthey in 1984, BCCI in 1991, Barings in 1995 and now Northern Rock in 2007, the UK authorities have repeatedly failed to spot trouble before wading in with taxpayers' cash.

#5 Canada , 1985: The Bank of Canada itself notes how the failure of 15 members of the Deposit Insurance Corporation – including two banks – accounted for less than 1% of the total banking system. Yet it led to long-term liquidity loans, funded by the public, plus 15 years of expensive court wrangling.

# 6 Sweden 's Systemic Crisis: In the early 1990s, two banks accounting for one-fifth of all Swedish banking assets were declared insolvent. By 1994, five of the six largest banks faced serious problems, costing taxpayers 4% of GDP in government support.

Don't the current heads of the world's biggest central banks ever flick through World Bank research reports while waiting to get their teeth straightened or beards trimmed...?

" Managing the Real & Fiscal Costs of Banking Crises " might even turn up after a quick Google search by junior staffers at the Federal Reserve, ECB or Bank of England.

Hell, we managed to find it easy enough here at BullionVault ...

But given the current collapse of real estate markets, banking models, hedge fund credit lines and short-term liquidity the world over since last August – back when Gold Bullion traded one-third below today's current price – who in their right mind would bother to read a study of 113 truly system-wide banking crises in 93 countries between 1970 and the year 2000...?

No one running monetary or fiscal policy in the G7 group of top economies, that's for sure!

"If the countries in our sample had not pursued any such [supportive or bail-out] policies, fiscal costs [borne in the end by the tax payer] would have averaged about 1% of GDP – little more than one-tenth of what was actually spent," write Patrick Honohan and Daniela Klingebiel in their report, published in Jan. 2002.

What's more, trying to bail out or support failing banks did nothing to reduce the economic drag that followed, according to Honohan and Klingebiel's analysis. The so-called "output dip" never responded to government meddling – not unless the central bank stepped in to ease liquidity problems at crisis-hit banks with unlimited cheap loans.

That kind of support – exactly the support given to Northern Rock as it went belly-up in Sept. last year – is only one step removed from the market-wide support now being offered to New York brokers today. Yet it "actually appears to have prolonged crises," write the two World Bank bean-counters, "because recovery took longer" following liquidity loans to effectively insolvent banks.

In other words, the only sure way of prolonging a financial crisis is to try and delay it. Say, by putting tax-payers "on risk" with $200 billion in mortgage-backed loans.

"Things could have been worse," the World Bank goes on. If every country hit by a systemic banking crisis during the 30 years to 2000 had piled in with liquidity support (like the G7 central banks are offering today) or blanket depositor guarantees (as the UK government did with Northern Rock), the final bill of trying to clear up the mess early would have risen sharply.

Throw in regulatory forbearance – letting "zombie" banks continue their operations, even though they're technically bust – plus repeated recapitalizations and debtor bail-outs, and "fiscal costs would have reached more than 60% of GDP."

Nasty rumors keep whacking "living dead" bank stocks in the City, Tokyo, Frankfurt, La Defense and on Wall Street right now. And so far, tax payers aren't on the hook for recapitalizations; UBS and Citigroup have gone to Asian and petro-wealth funds for that. Ben Bernanke has so far only demanded that subprime lenders write off the value of outstanding loans, rather than calling on Congress to issue the checks direct.

But if the authorities sat on their hands during this crisis, the fiscal cost might equal one per cent of GDP, the World Bank report suggests. Donning a cape, tights and mask instead – and pretending they can unwind the mal-investments caused by record low-interest rates from the Fed after the Tech Stock Bubble burst – the cost may rise 60 times over.

That's more than a 98% saving, if only the G7 authorities would sit back and let the failed banks fail.

Put these findings to one side, however. Because most remarkable about the World Bank study – other than the fact central bankers are so clearly ignoring it – is that anyone could ever imagine things differently.

Throwing "good money after bad" is a moral hazard that everyone's grandma knows to avoid. And just like the truly historic bubble in credit that created it, the endgame for today's official response to this historic banking crisis looks as inevitable as it's sure to prove painful.

"Fiscal outlays are not the only economic costs of bank collapses," note Honohan and Klingebiel. "The losses covered [by tax-payers] – which are caused by bad loan decisions – reflect wasted investible resources. Furthermore, a government's assumption of large, unforeseen bailout costs can destabilize fiscal accounts, triggering high inflation and a currency collapse – costly in themselves – as well as adding to the deadweight cost of taxation."

High inflation and a currency collapse, you say? As a rule, smarter investors spotting this trouble in good time can switch into hard currency to hedge their domestic inflation risk.

But today's systemic banking crisis crosses all developed economies...from North America to Japan and Australia onto Europe and the United Kingdom . So unlike the Asian Crisis of 1997, you can't flee the Thai Baht by hedging with Dollars today. Nor can you flee the Hungarian Forint for the safety of French Francs or Deutschemarks as you could when 25% of Budapest 's banking assets were caught in a mass bank failure in 1993.

Where to go?

What to use as a hedge against all currency risk?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules