Maximum Advantage in all Things: Bailout #6

The US House of Representatives finally succumbed to their whorish impulses after being enticed by a pork laden bailout bill. It will not stop the inevitable, it merely drags the rest of us kicking and screaming over the edge into the no-so-fun land of hyperinflation. At least I'll know whom to blame. Their system is doomed. Entropy will not be denied.

Readings:
Why Paulson's Plan is a Fraud. There are so many reasons. Also, why does the population of a country that prides itself on individuality keep acting like sheep. Could it be, all that individualism is as a puffer fish?

As one reader put it,“We have debt at three different levels: personal household debt, financial sector debt and public debt. The first has swamped the second and now the second is being made to swamp the third. The attitude of our leaders is to do nothing about the first level of debt and to pretend that the third level of debt doesn't matter at all.”

Dismal math. You think it's bad now? Wait until the Asians stop buying (but at least the Bailout will never really be funded by the treasury: since the isn't one). Let's all hold hands and flush...

Concerning Europe:

Thanks to decades of mollycoddling their domestic industries, you now have a situation where European banks - many of whom Asians haven't even heard of - are now bigger than the GDPs of their home countries. Why does the ratio of assets over GDP matter? Because to pay for failed banks to foreign creditors and all that, governments have to run a surplus to GDP for a while.

Let's take an example. Iceland moved to guarantee its banking sector even as its top three banks are about 13 times the size of its GDP. In other words, if the government runs a budget surplus of 10% of GDP (massively contractionary fiscal policy), it would still take a trifling 130 years or so to pay for all its borrowings needed. For Switzerland, this figure is a mere 100 years, while for those like Belgium, that ratio stands at some 75 years. Remember, these are just figures for the bank losses, not counting all the other stuff that will be lost as a result of the failure of the banking system; for example the industrial base, trade and so on.

The fact that not a lot of people take a logical view of math can be absorbed by the rise in Irish banking deposits this week after the government moved to guarantee the banks. Aren't the Europeans a wonderful people, so trusting and naive in the ways of the world?

Now, that is nuts! It seems the belief that Europe could survive a US meltdown was in error.

Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs. (See also The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster.) It isn't just bad mortgages. All the bubbles are popping:

The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure (Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

- A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

The fun never ends.