Bank Struggles and the 'Science' of Economics

As bank struggles worsen:
The 'science' of economics

By Roger Baker / The Rag Blog / August 31, 2009

See 'Meltdown 101: Why banks' struggles have worsened,' by Marcy Gordon, Below.

A viewpoint inspired by some bad banking news is cited in an article posted below.

But first, here are some likely economic dynamics that I see in play.

Under FDR when the banks went bust, the feds would step in and secure your savings. But now the feds are broke too, so they are selling T-notes to the federal reserve run by the biggest banks to provide the liquidity to prevent a panic of lenders among an aging, credit card-plagued U.S. population addicted to foreign oil and cheap Chinese imports. You hardly need a weatherman to know some kind of a storm is blowing up.

Foreigners increasingly shun T-notes, and the treasury has its hands full just borrowing enough to prop up the banks, to say nothing of the looming Fannie and Freddie deficits, etc. Given various deflationary headwinds, there is no way to get the economy back on track enough to restore bank profitability, mentioned as a lagging factor below.

Where are the stimulus funds going to come from on top of the next bailouts without generating impossible deficits? The stimulus funds are like a sugar high calculated to loosen up spending psychology, but there needs to be a stable track to climb onto.

Our current approach seems likely to lead to entitlements for certain special interests like investment banks and favored corporations, but also stagflation. Likely a continuation of our current situation where everyone is trying to downsize and shift their spending to basics. Basic needs which are likely to go up in price. A commodities bull market for oil and food, etc., but stagnation for non-essential needs. Maybe hyperinflation without making certain painful reforms.

Money tends to flock toward the most profitable sectors, previously high tech and housing. But now more likely industrial commodities, which are often bubble-prone due to an inelastic global supply. No more than a few years until another price spike for oil. China is said to be speculating in certain commodities like copper. But in the context of peak oil, stockpiling basic strategic commodities seems like a smart long term investment more than a risky gamble. The U.S. stockpiled strategic commodities after WWII and nobody raised an eyebrow. We still stockpile oil.

Economics is a branch of politics that aspires to be regarded as a science. It is actually based on nothing more predictable than mass psychology. The velocity of circulation of money is a function of mass spending psychology. This velocity tends to increase due to inflationary expectations, perhaps led by dollar devaluation.

If the public shifts from saving to spending freely, the system reacts exactly as if a lot more dollars were put into the economy, even if the government does nothing. If there is enough inactive money attracted from the sidelines, it can lead to uncontrolled inflation, which ultimately ends up as a bust.

A strong grassroots shift in widespread economic behavior is beyond the ability of a government, especially one plagued by deficits, to control very well. Interest rates are a weak way to steer an economy except during fairly stable and predictable times conducive to rational long range investments.

The problem of insufficient revenues to meet governmental commitments historically tends to be resolved through inflation. Savings are paid off in shrunken dollars. Inflation is in essence a concealed form of taxation resulting in a transfer of wealth to those who cannot be easily identified.

The US political system cannot even muster the political discipline to broaden and reform its health care system to match accepted world standards. Given this political paralysis, it is not hard to see that the most likely political outcome of the economic pain from a slack economy, short of an emergency, is to take the easy way out by injecting money and extending credit. Until that in in itself leads to a crisis, which might be abrupt in the case of devaluation.

Meltdown 101: Why banks' struggles have worsened
By Marcy Gordon / August 29, 2009

WASHINGTON — Despite signs of an improving economy, the nation's banks are still struggling — in fact, the pace of bank failures has accelerated.

What would it take to turn the banking sector around? And what can people do to protect their savings in the meantime?

Here are some questions and answers about the wave of U.S. bank failures, as the latest quarterly snapshot of the industry painted a grim picture.

Q: How bad is this wave of failures?

A: A cascade of collapses began last year as the financial crisis struck.

Eighty-one banks have fallen so far this year as tumbling home prices and spiking unemployment pushed loan defaults upward. That's the largest number in a year since the early 1990s, at the apex of the savings and loan crisis. It compares with 25 bank failures last year and three in 2007.

The failures have sapped billions from the federal deposit insurance fund, which guarantees account holders' money when banks go under. The fund stood at $10.4 billion in the second quarter, its lowest point since 1992.

The biggest failure this year: Colonial Bank, a heavy regional lender in real estate development based in Montgomery, Ala., which became the sixth-largest bank failure in U.S. history on Aug. 14. The Federal Deposit Insurance Corp. seized Colonial and sold its $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.

Some analysts believe another 100 to 300 banks could fail before the crisis runs its course, largely because of souring loans for commercial real estate. The number of institutions on the FDIC's internal "problem list" — those rated by examiners as having very low capital cushions against risk and other deficiencies — jumped to 416 at the end of June from 305 in the first quarter, the agency reported Thursday.

Q: What's behind this?

A: Banks around the country have run into trouble on their loans for construction and development, the fastest-growing category of troubled loans for U.S. banks, especially in overbuilt areas. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans.

Lots of banks have heavy concentrations of these loans in their lending portfolios, and some small banks are considered by regulators to be particularly vulnerable. Delinquent loan payments and defaults by commercial and residential developers have surged to the highest levels since the early 1990s, during the S&L crisis.

At the same time, some recent failures have been smaller banks brought down by garden-variety loans that have soured during the recession. Regulators say they're concerned about growing delinquencies on prime, conventional home loans.

Q: So even though the economy is starting to recover, banks are still struggling?

A: The condition of the banking industry is what economists call a lagging indicator: It falls behind the state of the economy because the problems take longer to percolate through banks, as opposed to other signposts such as consumer spending, gross domestic product or permits for building construction.

That means the pain will continue to weigh on the banking sector while the economy rebounds.

FDIC Chairman Sheila Bair offered a reminder on Thursday: "Banking industry performance is, as always, a lagging indicator."

Q: What will it take to turn the banking industry around?

A: Not much other than time, experts say.

"The only thing you could do is ... to ignore the losses that are already there," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington. That would be a terrible mistake, she said, noting that regulators' blind eye in the 1980s prolonged the S&L crisis.

"The best thing for the banking industry is just to take it on the chin and move on," she said.

Q: What about me? What can I do to protect my money in the bank?

A: Accounts are insured by the FDIC up to $250,000 per depositor per bank. Joint accounts are insured up to that amount for each co-owner of the account; individual retirement accounts, or IRAs, held in banks are also insured.

If you have multiple individual accounts at one bank, it's important to structure them carefully so they don't exceed the limits. The FDIC has a calculator on its Web site called the electronic deposit insurance estimator, or EDIE, that can help determine how much money in deposit accounts, if any, exceeds the insurance limits. You can find it here: http://tinyurl.com/lt3aok.

For any money in a failed bank's deposit accounts that exceeds the insured limits, you become essentially a creditor of the bank. You would eventually recover some of your money, but the amount can range from 40 cents on the dollar up to the full amount. Recovery of the money could take months.

Copyright © 2009 The Associated Press. All rights reserved.

Source / AP / Google News

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