Thar she blows: The last hurrah for the banking system
By Mike Whitney
Online Journal Contributing Writer
Jul 30, 2008, 00:18
The Bush administration will be mailing out another batch of
�stimulus� checks in the very near future. There�s no way around it. The Fed is
in a pickle and can�t lower interest rates for fear that food and energy prices
will shoot to the stratosphere. At the same time, the economy is shrinking
faster than anyone thought possible with no sign of a rebound. That leaves
stimulus checks as the only way to �prime the pump� and keep consumer spending
chugging along. Otherwise business activity will slow to a crawl and the
economy will tank. There�s no other choice.
The daily barrage of bad news is really starting to get on
people�s nerves. Most of the TV chatterboxes have already cut out the cheery
stock market predictions and no one is praising the �impressive powers of the
free market� anymore. They know things are bad, really bad. A pervasive sense
of gloom has crept into the television studios just as it has into the stock
exchanges and the luxury penthouses on Manhattan�s East Side. That same sense
of foreboding is creeping like a noxious cloud to every town and city across
the country. Everyone is cutting back on nonessentials and trimming the fat
from the family budget. The days of extravagant impulse spending at the mall
are over. So are the �big ticket� purchases and the �go-for-broke� trips to
Europe. Consumer confidence is at historic lows, disposable income is a thing
of the past, and all the credit cards are at their limit. The country is
drowning in red ink.
Something has gone terribly wrong with the economy, but no
one knows what it is? In the last three months, bank credit has shrunk faster
than any time since 1948. The banks aren�t lending and people aren�t borrowing;
that�s a lethal combo. When credit-creation slows, the economy falters,
unemployment rises and the misery index soars. That�s why Bush will have to
mail out more stimulus checks whether he wants to or not, his back is against
the wall. He�ll try to make it look like the economy is still breathing on its
own and just needs a spell on the respirator before resuming its normal
activities. But Bush is wrong; we�ve reached Peak credit and the blood
transfusions won�t work anymore. The vital signs have shut down and rigor mortis
is already setting in. Our goose is cooked.
More bank runs
On Friday, after the market had closed, the FDIC shut down
two more banks, First Heritage Bank and First National Bank. Two weeks earlier,
regulators seized IndyMac Bancorp following a run by depositors. The FDIC now
operates like a stealth paramilitary unit, deploying its shock troops on the
weekends to do their dirty work out of the public eye and at times when it will
least effect the stock market. The reasons for this are obvious; there�s only
one thing the government hates more than seeing flag-draped coffins on the
evening news, and that�s seeing long lines of frantic soccer moms and
blue-collar working guys waiting impatiently to get what�s left of their
savings out of their now-deceased bank. After all, flag-draped coffins merely
indicate that we�re losing a war, but lines at the bank prove that the system
is broken. And the system is broken, that�s why people are depressed and
confidence is waning.
Banks runs are a shock to the collective psyche; they
demonstrate that the stewards of the system are incompetent and have made a
mess of things. When depositors see a bank run they realize that their
hard-earned money is not safe. That�s why they get edgy and cut back on their
spending. When their confidence wanes, it extends to the whole system. Suddenly
they start questioning everything they once took for granted. They become
skeptical of the institutions which, just days earlier, seemed rock-solid. That�s
why bankers surround themselves with marble columns, vaulted ceilings and
lofty-sounding titles to maintain the illusion of security while masking the
truth that fractional banking is the biggest scam in history. It relies on the �greater
fools� theory which assumes that bankers can be trusted to only create credit
when it is backed by sufficient capital. But it is not true. The banks have put
us all at risk.
Bank runs are a direct hit on the foundation of the free
market system. Unchecked, the tremors can ripple through the entire society and
trigger violent political upheaval, even revolution. The public may not grasp
their significance, but everyone in Washington is paying attention. They take
it seriously, very seriously. It is a sign that the system is disintegrating
and it may be irreversible.
Saber-rattling at the FDIC
An article in the San Francisco Business Times said that the
FDIC is worried about the reporting on Internet blogs. They�d rather keep the
banking system�s troubles out of the news.
The publicity just further undermines the public�s
confidence and spreads fear. Sheila Bair, chairman of the Federal Deposit
Insurance Corp., summed it up like this after the run on IndyMac, �The blogs
were a bit out of control. We�re very mindful of the media coverage and blogs
in controlling misinformation. All I can say is we�re going to continue to stay
on top of it. The misinformation that came out over the weekend fed a lot of
Is that a threat? The cure for a failed banking system is
adequate capital and prudent oversight not threats to critics of the system.
That�s balderdash. Commissar Blair apparently believes that bloggers should be
treated the same way as journalists in Iraq, who, if they veer ever so slightly
from the Pentagon�s �the surge is a great triumph� script, find themselves on
the smoking end of an M-16 at some unmarked checkpoint outside Baquba.
If Blair wants people to take her seriously, she should stop
the paramilitary-type mothballing operations to shut down banks and tell the
American people the truth about what is going on. The banking system is busted;
Blair knows that as well as anyone. Now it�s time for someone to accept the
mantle of leadership, step up to the microphone and tell the public what they
really need to know: �My fellow citizens, we are embroiled in the greatest
financial crisis our nation has ever faced and we will have to take emergency
action to keep the entire system from melting down.�
How hard is that? But it won�t happen, because everyone in
the administration has an aversion to telling the truth; it�s like the Devil
and Holy Water. Besides, it�s easier to blame the bloggers, that harmless
subspecies that spend long hours pecking away at their keyboards in their windowless
five-foot by seven-foot hovels.
Bloggers aren�t the problem; the problem is a system that�s
collapsing from decades of abusive credit expansion and creation and
insufficient capital. Now everyone is going to pay for the excesses of the few.
As the bank runs increase, the FDIC will be forced to admit
the truth, which is they don�t have the resources to deal with a problem this
big. Currently, the FDIC has only $53 billion in reserves to guarantee $4
trillion in total bank deposits. The entire system has a mere $267 billion cash
in the vaults. What a shabby way to run a banking system. Where�s the money
going to come from when depositors start withdrawing their savings? How will
the FDIC deal with the ongoing deleveraging in the market which is forcing more
and more investors to move into cash?
No one knows. All we get is more prevaricating; more smoke
and mirrors, Bush assures us that �Our capital markets are functioning
efficiently and effectively.� Nonsense. The markets are cratering and the banks
are toast. A blind man can see it. The FDIC is listing and Blair knows it. Bush
needs to cut the gibberish and tell the American people the truth so they can
prepare for the hard times ahead.
P.T. PAULSON: �The the banking system is sound . . . This is
a very manageable situation.�
Last Sunday, sought Treasury Secretary Henry Paulson tried
to reassure the public that the banking system is sound, while bracing people
for more trouble ahead:
�I think it�s going to be months that we�re working our way
through this period -- clearly months. But again, it�s a safe banking system, a
sound banking system. Our regulators are on top of it. This is a very
Paulson is like a broken record. Everything is always
hunky-dory. He is the consummate Wall Street investment sharpie; a bright guy
who could charm a hungry dog off a meat wagon. But when it comes to telling the
truth, forget about it. You�d be better off listening to Bush, which isn�t
saying much. The banking system is not sound nor is it well capitalized. It is
a corpse that�s been propped up in the office hallway next to the watercooler
so that everyone who passes bye gets a stifling whiff of the decaying flesh.
Still, the charade goes on. Still the lies persist.
If the rate of bank closures continues at the present pace,
by the middle of 2009 there will be restrictions on withdrawals. Even now, if
you go to your bank and try to withdraw $9,000 or $10,000, it sends waves of
panic through the entire building like a 5-alarm fire that quickly engulfs the
main exits. It�s crazy. Tellers go scampering around helter-skelter, and bank
managers suddenly appear at the window grimacing in pain and wringing the sweat
from their brows.
�Did you say $10,000, sir?� which is usually followed by low
moaning sounds and heavy wheezing.
Journalist Bill Sardi summed it up nicely in an article last
week on lewrockwell.com, titled Could
Your Bail Fail? �The banking industry is walking on pins and needles,
hoping the bad news doesn�t become a self-fulfilling prophecy that drives bank
depositors to demand withdrawal of funds en masse . . . There is a high
likelihood the American banking system will fail, and you will likely be the
last to know. The more panicked you get, and withdraw funds, the worse the
implosion. In an effort to avert runs on the banks, will the news media delay
informing the public of the current dire situation, which appears to be an
inevitable system-wide banking collapse?
What to do?
�So, while your bank still has money and can process your
checks, it may be time to pay down debts, pay quarterly taxes and mortgage
payments in advance, and think of having money outside of banks (gold, foreign
currencies), etc., before your money is inaccessible or even evaporates!
�Don�t think all your investments outside of banks are
immune from all this turmoil. For example, money market mutual funds, where
Americans have invested $3 trillion, are not covered by FDIC insurance
(however, money market accounts offered by banks are covered). Recent losses in
some of these money market mutual funds have caused some companies to rush to
plug the losses. For example, Legg Mason, Inc., and SunTrust Banks, Inc.,
recently pumped $1.4 billion each into its money market funds. Bank of America
Corp. has injected $600 million.
�As for your checking and savings accounts, recognize you
may have five different accounts in the same bank, but the FDIC only insures
individuals, not each account, up to $100,000. Putting your money in different
accounts in the same bank does not necessarily provide better insurance for
your deposits.� (Bill Sardi, Could Your Bail Fail?,
Good advice, but if the whole system blows, we�re all in
trouble. It�s probably wise to have a back-up plan; like plenty of ammo and a
couple hundred pounds of seed potatoes. It could get hairy.
FANNIE BAILOUT: �If they dumped these securities on the
market today, their value would go straight to zero.�
Most people are unaware of the fact that the new Fannie Mae
and Freddie Mac bailout package that was passed into law on Saturday, provides
Paulson with $300 billion of taxpayer dollars to shore up the faltering
mortgage behemoths. In order to accomplish this, the congress increased the
national debt by a whopping $800 billion sending it over the $10 trillion mark
for the first time in history. Naturally, the congress buried this little
tidbit of information deep in the 600 pages of legislation. It�s clear that the
administration is lying about Fannie and Freddie. They�ll need much more than
the $25 billion infusion that Paulson is predicting. That�s why the national
debt is ballooning. This is the biggest boondoggle of all time and it�s
spearheaded by the �dueling windbags,� Chris Dodd and Barney Frank, both Democrats.
Dodd�s lengthy oratory on the floor of the House on Friday nearly earned him a
citation from the EPA for releasing massive levels of toxic gas into the jet
stream and accelerating the rate of global warming.
So it�s not just the Fed and the Treasury that are ruining
the system; the politicos are busy bankrupting the country, too. In fact, the
Fannie bailout could quite possibly be the last straw.
It now looks like Obama has been anointed by Wall Street
(who are his biggest contributors) to revive the Resolution Trust Corporation
(RTC) -- a morgue for dead banks -- so that the investment giants can off-load
hundreds of billions in bad paper in one fell swoop and purge the system. That
will be the big �post election� surprise, another bone for investment giants.
The path ahead has never looked so uncertain. Still, neither
Paulson nor Bernanke seem at all upset by the riskiness of their strategy or by
the fact that the nation�s economic future has been reduced to a crapshoot. The
Fed has already spent more than $300 billion to prop up the teetering banking
system in the last year alone, plus another $29 billion (that was never
approved by congress) to buy the toxic bonds from Bear Stearns in the JP Morgan
acquisition. Now, the Treasury has been authorized by congress to buy an �unlimited
amount� of Fannie and Freddie shares at their own discretion. They are
presently exchanging Fannie and Freddie securities for US Treasuries, which
means that the dollar is now backed by dodgy mortgage-backed sludge for which
there is no market. According to Rep Ron Paul, �This is the asset (MBS) which
now backs up our currency. An asset that no one else wants. If they were to
dump these securities on the market today, the value of these stocks would go
straight to zero. But that is literally the asset that is behind our currency.
It is a very serious situation.�
None of congress�s back room maneuvering has anything to do
with �providing a lifeline for the struggling homeowner,� as Senator Dodd claims.
That�s all bunkum. The homeowner won�t get a lick of help from this bill. It�s
just another handout for the brokerage fraternity. The country is putting its
AAA credit rating on the line for the same clique of carpetbaggers who created
the mammoth equity bubble in the first place. Now they are being rewarded for
their criminal conduct. Also, Bloomberg News notes, �Sensible people are
starting to question whether the U.S. can hang on to its AAA credit rating. The
prospect of an extra $5 trillion or thereabouts leaking onto the U.S.
government�s tab from Fannie Mae and Freddie Mac has spooked investors.�
America�s AAA rating will vanish in a year. It should be
zero anyway. No one really believes the US will repay its debts. The US bond
market is just a glitzy imitation of casino roulette only the odds are
Our political leaders have engineered this whole farce and
are now speeding up the process by savaging the dollar. How long before foreign
creditors see through this ruse and dump their dollar-backed assets on the open
market? The hoax can�t go on forever.
Of course, some market analysts think the banking system
will make it through this rough patch, even though it is likely to take a real
pasting. Economics guru, Gary North, for example, expects a slightly different
outcome which he details in his latest article on Lew Rockwell�s web site, Ben Bernanke�s Hush Money: �There is an
enormous difference -- a literally life-and-death difference -- between
individual bank failures and a systemic banking failure. I do NOT believe we
are facing a systemic banking failure. But we are facing more individual bank
failures . . .
�Beginning in December 2007, the Federal Reserve System has
sold Treasury debt whenever it has increased its purchase of questionable
assets that it has bought from banks and large financial institutions. It has
unloaded about 40% of its holdings of liquid Treasury debt. This has kept it
from inflating the money supply at a dramatic rate. At some point, it will run
out of Treasury debt to sell to the general public in order to offset the
increase of its purchase of questionable assets held by the financial system.
At that point, the great inflation will begin. This could be a year away. This
could be a month away. All we know is this: when the Federal Reserve System
runs out of Treasury debt to sell, its purchase of all assets will be
inflationary. The banking system as a whole is protected. What is not protected
is the purchasing power of the dollar.� (Ben Bernanke�s Hush Money, Gary North, lewrockwell.com)
North makes a good point; when the Fed runs out of US
Treasuries, they�ll have to rev up the printing presses and monetize the debt.
That�ll be doomsday for the dollar. When foreign central banks see the
greenbacks a-gushing like the blood from a harpooned whale, they�ll have to
sell off their dollar stockpiles and take the loss. That will trigger a period
of hyperinflation in the US. Everyone will pay for the excesses of the few.
The whole system has been rejiggered to serve the needs of a
few greedy bankers on top of the food chain. They could care less whether the
whole country blows up or not as long as they get their slice of the pie. That�s
all that matters. Congress is just as bad. They abdicated their most important
responsibility by giving Paulson the authority to take whatever money he needs
to do whatever he wants. If that�s their attitude, then what do we need
congress for? Let�s just board up the House of Representatives and Senate and
send them all home. It would be a lot cheaper.
The truth is, the big money guys have taken a wrecking ball
to the financial system and have now moved on to the real economy. By the time
they�re done, we�ll all be picking through the rubble just to feed our
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.
Copyright © 1998-2007 Online Journal
Email Online Journal Editor