PHASE TWO OF A RECESSION
Banks bailing lenders out!
World economy: Credit crunch fallout begins to spread
By Nick Beams
While stock markets have stabilised—at least for the time being—the
effects of the credit crunch sparked by the crisis in the US subprime
mortgage market are now working their way through the banks and
financial institutions and the economy as a whole.
This week, the financial fallout spread to Britain where HBOS, the owner
of Halifax and Bank of Scotland, announced that it would extend credit
to Grampian, a $37 billion debt-financed fund, or conduit, which deals
in repackaged loans, including mortgages, credit cards, and motor loans.
The bank said the funding would continue until market finance improved
to an acceptable level.
In Germany, where two banks IKB and SachsenLB have already been hit by
the liquidity crisis, it is clear that the problems extend deep into the
financial system. As a report in Monday’s Financial Times noted:
“SachsenLB and IKB may have been small players but the impact of their
downfall and the embarrassment faced by the Bundesbank [Germany’s
central bank] have spread far beyond Germany. Financial markets and
policymakers have been left worrying whether further bank crises are
lurking and whether bank regulators are really in command of the facts.”
According to Alexander Stuhlmann, the chief executive of WestLB, another
state-owned regional bank, the situation facing the German banks was
“not uncritical.” “We sense a reluctance on the part of foreign partners
to extend credit to German banks,” he said. “If we have a banking crisis
in Germany with other countries cutting us off, then other banks will
also face difficulties.”
The German banking system has been among the hardest hit by the credit
crisis because of the moves over recent years by smaller banks,
particularly the state-owned Landesbanken, to counteract the effects of
a downturn in the domestic market and increased competition pressures by
engaging in riskier financial investments. While the major Landesbanken
are outside the top 30 of Europe’s biggest banks, they all rank among
the top 30 conduit sponsors.
The problems in the banking sector have led to calls from industry for
the European Central Bank [ECB] to cancel a rise in interest rates
planned for next month. According to the German Chamber of Industry and
Commerce (DIHK), banks had already tightened lending standards and
raised borrowing costs for small companies.
Issuing a plea that the ECB not raise rates, DIHK chief economist Axel
Nitschke said: “What we are seeing in the credit markets is likely to
have a major effect, damping economic dynamism in coming months, not
just in Germany but across the world.” He said the DIHK had been
receiving distress calls from middle-sized German companies back in
The flow-on effects of the crisis on the broader economy were also the
subject of a warning by John Lipsky, the number two official at the
International Monetary Fund. Speaking to the Financial Times, the IMF
first deputy managing director warned that the financial market turmoil
would “undoubtedly dampen economic growth”. While so-called “emerging
markets” had so far withstood the crisis, he added, it was “far too
optimistic” to assume that there would be no impact at all.
There would be no quick end to the turmoil because of the uncertainty as
to how much damage it would do to economic growth. There were also
dangers for the entire financial system caused by the lack of
transparency on the part of the banks as to the true extent of their
exposure to riskier investments.
“Lack of transparency can create doubts that translate into market
volatility,” Lipsky said. “We are finding that in some cases regulated
financial institutions are carrying off-balance-sheet risks that have
indirect implications for those institutions.” This had caused
uncertainty about the level of risk born by major institutions, which
contributed to the drying up of liquidity in parts of the financial
As far as the broader economy is concern, the chief fear is that the
slump in the US housing market will lead to a fall in consumption
spending and the onset of a recession. On Thursday, Countrywide
Financial’s chief executive Angelo Mozilo warned that the housing market
was showing no signs of improvement. Asked if this could bring about a
recession, he said: “I think so ... I can’t believe ... that doesn’t
have a material effect.” There was a “very serious situation” in the US
housing market and the environment was “certainly not getting better.”
The latest industry figures and surveys bear this out. The median price
of new homes has fallen from $262,000 in March to $237,000 in June—a
decline of nearly 10 percent in just three months—while the overhang of
unsold homes is equivalent to 7.8 months’ supply.
According to the data firm RealtyTrac, the number of US homes facing
foreclosure increased by 58 percent in the first six months of the year.
In all, 573,397 properties faced some kind of foreclosure activity in
the first half the year, including notices of default, auction sale
notices, or repossession by lenders. And the number of foreclosure
filings could rise to 2 million by the end of the year.
The housing slump is impacting on other areas of the economy as profit
warnings by Wal-Mart, Home Depot and Macy’s indicate. Car sales in July
were the lowest in nine years.
Some of the processes at work in the mortgage crisis and in the US
economy as a whole were revealed in an article on income figures
published in the New York Times on Monday. An analysis of tax statistics
revealed that the average income in 2005 was still 1 percent less than
in 2000 after adjusting for inflation. This was the fifth consecutive
year that American wage-earners had made less money than at the peak of
the last cycle of economic expansion in 2000. This was a “totally new
experience” in the post-war period, which saw total incomes listed on
tax returns grow every year, with a single-year exception, until 2001.
These statistics make clear why the housing bubble, which played such a
decisive role in the growth of the US economy since the recession of
2000-2001, was destined to collapse. While house prices and consumption
spending in general were being inflated by the expansion of credit and
lower interest rates, real income for the vast majority of working
people in the US was going in the opposite direction, creating the
conditions for a “scissors crisis.” Now the bursting of the bubble has
set in motion economic forces that could bring a recession not only in
the US, but in the world economy as a whole.
AND IS PHASE THREE, BANK RUNS?
This started to happen in Cyprus when World Banekrs decided to take
l0 % of everybody's life savings. They had to back off a couple of days after
Study the history of bank runs. Google it. Go to the URLS given below.
Ever hear the phrase, "don't keep all your eggs in one basket?" That
refers to INVESTMENTS. BANK ACCOUNTS even. ANYTHING that depends on
banks. The BOA or anything that depends on the solvency of the US of A
A run on a bank occurs when a large number of depositors, fearing that
their bank will be unable to repay their deposits in full and on time, try
to withdraw their funds immediately. This creates a problem because banks
keep only a small fraction of deposits on hand in cash; they lend out the
majority of deposits to borrowers or use the funds to purchase other
interest-bearing assets like government securities. When a run comes, a
bank must quickly increase its liquidity to meet depositors' demands. It
does so primarily by selling assets, frequently at fire-sale prices. Losses
on these sales can make the bank insolvent.
There is no true FDIC insurance or protection. The Gov has 25 yrs time to pay back what you lost. Some say 99 yrs. So it's bogus.
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