Were it not for ever-greater increases in central-banksterz fiatz lavatory money - and the market expectation that bolshevikz governmentz are about to make taxpayers shoulder commercial banksterz' huge losses, the fiat money bolshevikz systems would presumably 666collapse right into 666 fire -
International interbank short-term lending 666rates say it all: the latest drastic increases in yield spreads between bolshevikz money-market rates and official elitz 666central-bank rates are indicative of the growing reluctance among banksterz to extend loans to each other, for fear that borrowers could default on their payment 666obligations (see graph below)...
bearnuckelz pawz -
Under today's fiat-money regime, banks, under governments' auspices, increase the money stock "out of thin air" whenever they extend loans. The money supply is built on credit, which, in turn, hinges on peoples' confidence in banks and banks' confidence in their borrowers' ability and willingness to service their debt.
As confidence leaves the system, banks refrain from extending loans and demand repayment of outstanding loans, and the money stock contracts. Economies that have for decades been fuelled by ever-higher doses of credit and money fall into depression — that is, declining production, employment, and prices. Where the Losses Come From
To better understand the drop in confidence in the paper-money system, one should take a look at the issue of banks' accounting losses and payment losses. Assume, for instance, a bank buys a corporate bond for, say, US$100 and records it in its balance sheet.
If the bond price declines to, say, US$50 (due to rising market yields), the bank would have to make a write-down. The resulting US$50 loss would, via the profit-and-loss account, reduce the bank's recorded equity capital.
As long as the issuer of the bond continues to service his debt, however, the bank would recover its investment over the time. The accounting loss would not diminish the banks' capacity to pay its obligations vis-à-vis its own depositors and creditors.
If, however, the market price of the bond declines because its issuer no longer pays, the banks' incoming cash flows would be lower than hitherto expected, resulting in a payment loss — and this could, if payment losses are large, make the bank default on its obligations. The Issue of a Loss of Confidence
An accounting loss can easily develop into a payment loss. This is because bad news about banks' financial health (profit warning) can trigger a loss of confidence. Such a market reaction is rational, given the system of fractional-reserve banking.
Under fractional-reserve banking, banks keep just a fraction of their immediate payment obligations (basically sight deposits) in the form of cash. As a consequence, they cannot meet all their payment obligations should customers whish to withdraw their sight deposits all at once.
However, banks enjoy a privilege granted by the government. Central banks, the holders of the money supply monopoly, can provide banks with whatever amount of cash is needed. With central banks acting as lender of last resort, the chances for a bank run, initiated by private savers, have been greatly reduced.
What spells trouble, however, is an institutional bank run: banks lose confidence in each other. Most banks rely heavily on interbank refinancing. And if interbank lending dries up, banks find it increasingly difficult, if not impossible, to obtain refinancing (at an acceptable level of interest rates). Maturity Transformation and Credit Derivatives
An institutional bank run is particularly painful for banks involved in maturity transformation. Most banks borrow funds with short- and medium-term maturities and invest them longer-term. As short- and medium-term interest rates are typically lower than longer-term yields, maturity transformation is a profitable.
However, in such a business, banks are exposed to rollover risk. If short- and medium-term interest rates rise relative to (fixed) longer-term yields, maturity transformation leads to losses — and in the extreme case, banks can go bankrupt if they fail to obtain refinancing funds for liabilities falling due.
Growing investor concern about rollover risks has the potential to make a bank default on its payment obligations: interest rates for bank refinancing go up, so that loans falling due would have to be refinanced at (considerably) higher interest rates. The latest price action clearly suggests that banks active in maturity transformation could be up for quite some trouble (see graphs below).
In an environment of rapidly declining confidence in the banking system, investor concerns about derivative instruments, credit derivatives in particular, may well accelerate the very forces that disintegrate the fiat-money regime.
To be sure, there is nothing wrong with credit derivatives as such. Credit derivatives are instruments that help to value, trade, and reallocate existing risks among market participants, thereby making the financial system more efficient.
However, the outstanding expansion of credit derivatives, heaped upon a gigantic paper-credit pyramid, has been stimulated to a great extent by central banks' chronic low interest rates, having made investors search for yield pick-up and ignore credit and market risks.
There is little experience with how the financial positions of market participants would be affected in the case of major players going bankrupt. The extraordinary size and complexity of the credit-derivative market could pose a substantial unwinding challenge in the event of the exit of several major counterparties.
Closing out and replacing positions could lead to drastic changes in underlying financial-asset prices. As investors cannot be sure that all market participants could weather the consequences of a default in the underlying credits or the effects of a prolonged disruption to market liquidity, confidence in the solidity of the monetary order may drop even faster in times of market stress. Postponing the Ultimate Disaster
The issues outlined above are symptoms of the crumbling monetary (dis)order. Their underlying causes are to be found in the government-sponsored expansion of bank credit and money. It is a system that stretches the monetary demand beyond the economies' economic resources.
By artificially lowering the interest rate through credit expansion, central banks induce inflation-induced boom-and-bust-cycles, which lead to unsustainable debt levels. In all western countries overall debt levels as a percent of GDP have gone up strongly in recent decades.
Whenever financial markets set out to end the disastrous process through, for instance, a decline in economic activity, governments and their central banks will do whatever it takes to keep the fiat-money system going: lowering interest rates by increasing credit expansion and increasing the money supply.
In the current situation, however, banks' capacity to keep expanding the credit and money supply has been greatly diminished: accounting losses and — due to waning confidence in the system — presumably also payment losses erode banks' equity capital further in the time to come.
With their far-reaching coercive power, however, governments may, at least temporarily, be in a position to prevent an imminent implosion of the credit and money system. Governments can decide to redistribute peoples' incomes on the grandest scale: shoring up banks' eroding equity capital or guaranteeing financial institutions' assets or liabilities, or nationalizing the banking/finance industry.
At a more technical level, central banks can be made to refinance banks directly, thereby replacing the interbank markets altogether. In such a regime, central banks would presumably not only fix the short-term (overnight) interest rate but medium- to longer-term interest rates as well.
Alternatively, central banks can prop up banks' capital base by taking over their loss-making assets — a procedure already adopted by the US Federal Reserve and by other central banks, as they have also started accepting securities of questionable value in their open-market operations.
When central banks form an international cartel — with the purpose of preserving the fiat-money system — domestic banks wouldn't default, even if their payment obligations are denominated in foreign currency (which the national central bank cannot produce): central banks would simply lend money to each other. Abandoning the Path Towards Inflation
By increasing the base money supply in the interbank market, guaranteeing financial institutions' liabilities or nationalizing the banking industry, governments suppress free-market forces, which could move the system back towards equilibrium.
There should be little doubt that, after decades of government sponsored credit and money-supply expansion, such a correction would be economically painful, accompanied by further bank failures and output and employment losses.
However, it is hard to see how fighting the symptoms of the unfolding monetary fiasco could solve its underlying cause. Starting the printing presses wouldn't solve the debt crisis either. Hyperinflation would cause economic and political damage to the greatest possible extent.
To qualify as a remedy to present ills, government action needs to be constrained to a far-reaching reform of the monetary systems, which, if implemented properly, would neither cause deflation nor inflation.[1] Markets need to be liberalized to the greatest extent to allow prices to adjust back to equilibrium.
Print $17
Audio $25
A return to sound money is needed. This would, as outlined by many Austrian economists, require putting an end to government's monopoly over monetary affairs. The power for determining the quantity and quality of money must be returned to free-market forces. Money in the hands of the government and its central bank would sooner or later become the ruin of the free societal order.
As Ludwig von Mises noted,
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.[2]
Thorsten Polleit is Honorary Professor at the Frankfurt School of Finance & Management. Comment on the blog. Notes
[1] In this context see, for instance George Reisman, "Our Financial House of Cards," 25 March 2008.
[2] Ludwig von Mises, Human Action, Chapter XX, section 8.
WASHINGTON -- The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for preferred shares of nine major banks, people briefed on the matter said.
The companies are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., the people said. One of the people also said Merrill Lynch & Co. will receive an investment.
The injections represent a new approach for Treasury Secretary Henry Paulson's attempts to prevent a financial market meltdown from sending the U.S. economy into a prolonged recession. He's following similar interventions by European leaders and using broad powers Congress gave him earlier this month to save the country's banking system.
"They've decided they need to do something drastic and this is drastic," said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.
None of banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.
The government will also guarantee the banks' newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.
... Allocating Money
The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Goldman and Morgan Stanley will each get $10 billion, while State Street and Bank of New York will get injections of about $3 billion each, people said.
Financial institutions are struggling to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Falling share prices have made it harder to raise equity while surging borrowing costs have made debt refinancing harder.
Paulson, Federal Reserve Chairman Ben S. Bernanke, and FDIC Chairman Sheila Bair scheduled at 8:30 a.m. press conference tomorrow in Washington. Paulson's initiative follows an announcement in Europe that France, Germany, Spain, the Netherlands, and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.
The press conference at Treasury will address "a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets," the department said in a e-mailed statement.
Chief executive officers of major U.S. banks met with Paulson to discuss the options for helping markets. Stocks in the U.S. earlier today rallied the most in seven decades, pushing the Standard & Poor's 500 Index up 11.6 percent.
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/. --
$600-Trillion in pension derivatives missing - ? -
ex. Coming Soon: The $600 Trillion Derivatives Emergency Meeting -
Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market. According to figures released in the quarterly review of the BIS (pp A103) in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 TRILLION as of December 2007.
This means that Paulsen will have to intervene 857.14 times with $700 billion dollars each time, in order to clear the derivative debt from the books - the bill passed, HE WILL BE ABLE TO DO THAT - AS MANY TIMES AS HE WANTS TOO - and for each time - it will be - less pension money for the people -
The question is, how many times will he? I suspect that he will only be able to do it about 4 times before the dollar is reduced to a penny or two.
Now we haven't even calcuated in the commercial real estate collapes (body waste) that is going to hit the electric cooling device (fan). Oh my, oh my... we haven't seen anything yet -
the fedz fiatz$ doomed - elitz 666circuz planned collapse? -
Thomas Jefferson quote to Secretary of Treasury in 1802 and links -
"I believe that banking institutions are more dangerous to our liberties than standing armies.
If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.
The issuing power should be taken from the banks and restored to the people, to whom it properly belongs" -
Thomas Jefferson - letter to the Secretary of the Treasury Albert Gallatin (1802).
mick well said, most of us are looking for a president for leadership - and good gov't policies with smaller gov't too.
the more polo-ticz bureaucratz - all takes bigger and bigger golden umbrellaz - the less bread to the people - only the 666dustz is left - ground666zero - --
A "protection racket" is a scam where an aggressor instigates an attack, blames it on a bogeyman, and then offers to protect the victim from this bogeyman in - return for money and power...
Jesus was Jewish - so lets just say the evilness of mans lust for greed and power. The object of the game monopoly is to make the other player go broke so you can win. That is what is happening on a much bigger scale right now with real money. --
The way you win at monopoly is to make the other person playing go broke. Simple fact is that Obama is spending millions upon millions of dollers to win.(will it be payed back) Um... nooo. Also his mother married two muslims yet she was an atheist? Know what I think she only said she was an atheist to hide the fact she was really a muslim. That way her family would leave her in the will. Could be the same reason she had a hard time keeping those relationships. by buyittradeit --
Throughout history God has graciously delayed judgment on nations or peoples - http://www.rense.com/ The U.S. used to be one of the "gentile world powers," and closely linked with the European Community - to the bolshevikz robbed their own people -
Well said, conspiracy? there is an underground [worldwide] one too -
the more elitz polo-ticz bureaucratz bolshevikz pawnz - all takes bigger and bigger golden umbrellaz - the less bread to the people - only the 666dustz is left - ground666zero -
Sign the “No More Bailouts” Petition - (bailouts = elitz bolshevikz 666black mails) Bailout of Fannie Mae and Freddie Mac - $200 Billion Bailout of Bear Stearns - $29 Billion Bailout of AIG - $85 Billion Bailout of money market funds - $50 Billion Bailout of the rest of Wall Street - $700 Billion Total cost to date – Over $1,000,000,000,000. That’s one TRILLION dollars. Trillion with a “T”!
Can you spare any more of your hard-earned money for these bailouts? We didn’t think so. If you’re sick of the bailouts, sign our petition to the President and Congress saying “No more!”
The Republican Party ran a campaign intended to lose? First off, they choose a loser candidate? Mitt Romney had more appeal to voters than did John McCain. Yet Mitt Romney suddenly, for no apparent reason, when he was leading McCain by a wide margin, dropped out of the race. And once “the candidate,” McCain campaigned with the same ineptitude, the same lackluster, the same disorganized inefficiency that Bob Dole did against William Jefferson Clinton........
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