Whilst all the focus has been on the negotitations around the bailout of the US financial system the biggest bank failure in US history passed without fanfare.
Washington Mutual collapsed on Thursday and had its assets sold to JPMorgan for $1.9bln. Not much to say really.
Over the weekend, Bradford and Bingley, a British insititution, was nationalised by the government.
Fortis, The Belgo-Dutch financial services company, received in Eur12bln infusion from Belgium, Dutch and Luxembourg governments his morning. It’s only just out on the wires so you’ll have to keep searching for up to date information.
As credit lines dry up this will only continue. As anyone who has read John Tomlinson’s paper in the research section will know, it’s all about confidence.
If we don’t have confidence in banks then they will fail.
Why? Because our whole financial system is based upon fractional reserve banking.
Less than 3% of the actual money supply is real “cash” money. The rest is just numbers on a spreadsheet. In reality its all the same. But cash will always rank above digital money in a system which loses confidence.
Of course one can then ask what is the value of cash, a bit of paper which simply offers itself as legal tender and will be accepted in return for more of the same.
It’s clear that banks have created money to purchase assets that have fallen in value. That’s the basic issue here.
So the equity on their balance sheets has fallen.
Nothing can change that. Adding to that is the fact that capital ratios are already at historic lows so many banks are operating right on the edge. For banks like Northern Rock and Bradford and Bingley who operate by borrowing from the wholesale market it is the end.
They have no chance at all of acquiring the capital they need to function.
The solution is remarkably simple.
Throw out Basel II which is a crock and raise banks’s capital requirements.
Stablilise the system and create a more stable environment.
As Nancy Pelosi said “the party’s over”.