Banks continue to fall like dominoes
September 28th, 2008Whilst 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.
Next up.
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”.
Tags: banking, credit crunch, financial crisis, money
October 10th, 2008 at 5:07 am
Hi Raf,
Have you caught up with the ideas from NZX and NZI – 6 ideas to help NZ economy.
There are so many levels to look at
I had a crack at it all as well over at
http://www.dialogcrm.com/blog/2008/10/10/new-business-paradigm-needed/
Ultimately we need a change of mindset
October 10th, 2008 at 11:35 pm
Hi Raf,
To the two of us, recent events come as no suprise as we both knew that the crisis was no where near over after the rescue of Bear Stearns. Though its nice to be vindicated after warnings being dismissed, I can’t but feel sorry for those whose livelihoods have been devastated by this economic disaster.
It appears even the country’s brightest economic minds are clueless as to the seriousness of the crisis after witnessing Mark Wheldon’s reassurances that the trouble was over after the temporary recovery of the US market due to the US Congress’s approval of the bailout plan.
What do you see the most likely macroeconomic scenario is going to be in the medium to long term? Hyperinflation caused by central banks pumping hundreds of billions of liquidity into the markets or deflation caused by a crisis of confidance in the markets and on the part of consumers and as a result of banks inevitably jacking up interest rates to attract capital away from other asset classes?
October 11th, 2008 at 4:13 am
Jason,
Nice post and agree we need some kind of local response plan.
James,
Good to hear from you. I’ll post a response to you both on a new thread.
September 28th, 2010 at 9:34 am
[...] So Basel III is finally with us…….phew……can’t wait for Basel IV. I’m not sure about a fifth one as that really would be a joke too far but then again if we can have a Rocky and Rambo V why not Basel V? We will really be up the creek when that one comes out. Is this one likely to change anything? No one seems to think so but then again 2 years ago I said the same thing about Basel II!! [...]