October 6, 2010
As the Telegraph noted
Lenders across Europe and the US are
facing a $4 trillion refinancing hurdle in the coming 24 months and
many still need to recapitalize, the Washington-based organization
said in its
Global Financial Stability Report.
Governments will have to
equity into banks - particularly in Spain, Germany and the US
- as well as
prop up their funding structures by extending emergency
Prop up their funding structures?
Virtually all leading independent economists
have said that
the too big to fails must be broken up, or the
economy won't be able to recover, and that smaller banks
lend more into the economy than the
mega-banks (and see
And the leading monetary economist
told the Wall Street Journal that
this was not a liquidity crisis, but
an insolvency crisis.
She said that Bernanke is fighting the last war,
and is taking the wrong approach.
Nobel economist Paul Krugman and leading economist James Galbraith
The Telegraph continues:
“Progress toward global financial
stability has experienced a setback since April... [due to] the
in sovereign debt markets,” the IMF said. “The global
financial system is still in a period of significant uncertainty and
remains the Achilles’ heel of the economic recovery.”
Turmoil in sovereign debt markets
necessitating another round of bailouts?
This is amusing, given that it was the
last round of bailouts which
caused the sovereign debt crisis in the first place.
Specifically, the Bank for International
Settlements (BIS) - often described as
a central bank for central banks -
slammed the failure of the Fed and
other central banks to force companies to write off bad debts years ago.
the Fed and other central
banks were simply transferring risk from private banks to governments,
which could lead to a sovereign debt crisis.
That is what caused the
sovereign debt crisis in the first place!
cautioned that bailouts could harm the
economy (as did the
former head of the Fed's open market operations).
The Telegraph continues:
Although banks have recognized all but
$550bn of the
$2.2 trillion of bad debts the IMF estimates needed to be
written off between 2007 and 2010, they are still facing a looming
funding shock that will need state support.
“Nearly $4 trillion
of bank debt will need to be rolled over in the next 24
months,” the report says.
In reality, Tyler Durden, Mike
Shedlock, Edward Harrison, Reggie Middleton, Max Keiser and many other savvy
financial commentators would put the number closer to $20-40 trillion in bad
And they say that one of the main problems with the world economy is
that the banks are hiding the real amounts of their debts (and the fact that
they are totally insolvent), so that they can have the taxpayers bail give
them a number of bailouts.
In other words, the big banks are saying,
economy is unexpectedly not doing well, so we need another bailout."
And the banks and their water-carriers in the
central banks, IMF and other agencies will repeatedly say the same thing
over a number of years to slowly get the banks' $20-40 trillion dollars
worth of debt mopped up by the taxpayer.
See how that works?
If people knew that the
giant banks have created a black hole of debt large enough to suck most of
the world economy into it, and that the debt was created through fraud and
wild gambling and speculation, demands to break up the giant banks and
imprison their management would be overwhelming.
So they hide it...
Instead, they leak out a little information
about their debt in dribs and drabs over the course of many months and
years, acting surprised that there's still debt on their books due to
"unexpected" conditions in the economy. The party line is and will continue
to be that these conditions aren't their fault, but are due to the bad
housing market, or unemployment, or other conditions "out there in the
economy" and not of their making.
And, of course, bailouts are needed to
deal with these "unforeseen" events.
Remember, the largest U.S. banks have
gone bankrupt due to wild speculation, and the government helped to cover it
up. Many top analysts have said the U.S. banks are insolvent (see
this, for example). And the big banks have
hidden huge liabilities in
"off balance sheet" accounts.
The IMF adds: “Without further bolstering of
balance sheets, banking systems remain susceptible to funding shocks
deleveraging pressures and place a further drag on
public finances and the recovery.”
Intensify deleveraging pressures?
Deleveraging is what we need
to stabilize the economy.
As I've previously noted:
The New York Federal published a
report in July entitled "The Shadow
Banking System - Implications for Financial Regulation".
One of the main conclusions of the report is
that leverage undermines financial stability:
Securitization was intended as a way to
transfer credit risk to those better able to absorb losses, but
instead it increased the fragility of the entire financial system by
allowing banks and other intermediaries to “leverage up” by buying
one another’s securities.
In the new, post-crisis financial system,
the role of securitization will likely be held in check by more
stringent financial regulation and by the recognition that it is
important to prevent excessive leverage and maturity mismatch, both
of which can undermine financial stability.
And as a former economist at the New York
Fed, Richard Alford,
On Friday, William Dudley, President of
an excellent presentation on the
financial crisis. The speech was a logically-structured,
tightly-reasoned, and succinct retrospective of the crisis. It took
one step back from the details and proved a very useful financial
The speech should be read by everyone with
an interest in the crisis. It highlights the often overlooked role
of leverage and maturity mismatches even as its stated purpose was
examining the role of liquidity.
While most analysts attributed the
crisis to either specific instruments, or elements of the
de-regulation, or policy action,
Dudley correctly identified the causes of the crisis as the
excessive use of leverage and maturity mismatches embedded in
financial activities carried out off the balance sheets of the
traditional banking system.
The body of the speech opens with:
crisis was caused by the rapid growth of the so-called shadow
banking system over the past few decades and its remarkable
collapse over the past two years.”
In fact, every independent economist has
said that too much leverage was one of the main causes of the current
Federal Reserve Bank of San Francisco
President Janet Yellen
said recently that it’s “far from
clear” whether the Fed should use interest rates to stem a surge in
financial leverage, and urged further research into the issue.
rates than called for based on purely macroeconomic conditions may help
forestall a potentially damaging buildup of leverage and an asset-price
And as Nouriel Roubini
said last year,
"This is a crisis of
solvency... But true deleveraging has not begun yet because the losses of
financial institutions have been socialized". i.e. that last round of
bailouts prevented deleveraging.
And remember, money from the last round of
bailouts wasn't exactly used for the best purposes as far as the economy is
pointed out in May:
The $700 billion dollar TARP bailout was a
massive bait-and-switch. The government
said it was doing it to soak up
toxic assets, and then switched to saying it was needed to free up
didn't do that either. Indeed, the Fed
doesn't want the banks to lend.
wrote in March 2009:
The bailout money is just going to line
the pockets of the wealthy, instead of helping to stabilize the
economy or even the companies receiving the bailouts:
The Treasury Department
encouraged banks to use the bailout money to
buy their competitors, and
pushed through an amendment to the tax
laws which rewards mergers in the banking industry
(this has caused a lot of companies to bite off more than they
can chew, destabilizing the acquiring companies)
And as the New York Times
"Tens of billions of
[bailout] dollars have merely passed through A.I.G. to its
derivatives trading partners".
In other words, through a little game-playing by the Fed, taxpayer
money is going straight into
the pockets of investors in AIG's credit default swaps and is not
even really stabilizing AIG.