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  • Owen
  • 138 Comments

  Sep 30 12:14 PM
  Much of these numbers are accounting fiction. When a mutual fund buys bonds of banks who use the money to lend to companies who, in turn, use it to offer lease-buyback deals to their customers, the same loan is counted three times. It's impossible to tell whether the absolute amount of debt has increased, or there are just more intermediaries.

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  • GaryD
  • 81 Comments

  Sep 30 12:20 PM
  Hmmm....based on this guys track record of getting just about everything wrong this post makes me think that the credit contraction is much worse than people are saying.
  
  The St. Louis Fed data series cited only goes to the end of July...not exactly a reflection of what is going on in the markets right now. Our fine Doctor of Piled High and Deep is looking at lagging and outdated numbers when he should be looking at interest rate spreads to get an idea of what is happening. He clearly has no functioning knowledge of capital markets. Does he think that Washington Mutual just decided to close up shop for the hell of it?
  
  

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  • constructe
  • 384 Comments

  Sep 30 12:49 PM
  He has a point. Banks are happy to loan to viable people and businesses to offset house loan decreases. The problem Paulson wants to fix is banks not leanding to banks. That's because they are all hiding losses and have defaulting mortgage backed securities and mispriced credit default swaps. I wouldn't loan to them either. If you think they are that great why aren't you buying up their bonds. It's because many are broke and hiding it, not because they have no faith in the market etc. Even $700 billion won't do mutch to help them. They wrote $61 trillion CDS and 15.5 billion in mortgages with a default rate rising to over 4%. Who knows it could go to 10-15%. We are only on the tip of the iceberg in terms of a recession.
  
  No amount of $ can stop it now. But when it happens if you are credit worthy they will lend to you.

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  • Reinko
  • 346 Comments

  Sep 30 12:54 PM
  To Owen:
  It might be true that it is counted three times, but it also has to get paid back three times. When somewhere in a three long chain things start to fail, the rest of that (small) chain could come in danger.
  
  For the rest, the pics above only demonstrate that on all levels of US society/economy it is a classic Ponzi financial unit.
  
  In a Ponzi financial unit, debt levels are so high that even for the interest to be paid new debt is needed.
  
  As an example: Look at that FDIC bank insurance fund. It is just an accountant verhicle in the sense it measures what the banks have paid and how much is used to save banks. But in fact all that 45 billion is gone a long time ago.
  Every cent and every dollar needed to save a bank has to be borrowed by the Treasury.
  
  On all levels of US society and economy and government, all real reserves are lost. All that is left is the ability to borrow more and more.

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  • Stone Fox Capital
  • 94 Comments
  • My Website

  Sep 30 01:42 PM
  Are these total loans outstanding or new loans? We already know that new real estate loans should be down substantially b/c less houses are being sold and for smaller prices. Data doesn't add up.

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  • User 270430
  • 58 Comments

  Sep 30 05:39 PM
  constructe and Reinko:
  
  I salute your salient discussion.
  
  Its a bulwart against the propaganda machine now being released by the capitalist elites which want Main Street to believe its a "rescue" not a bailout...
  
  

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  • Bo
  • 2 Comments

  Sep 30 07:13 PM
  Owen: If you check the caption at the top of the first graph it reads........of Commercial Banks. The data does not include any of the other possible particpants in the example you cited

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  • Brian27
  • 37 Comments

  Oct 01 08:42 AM
  The basic problem is that banks are under capitalized because the value of MBS have fallen, in varying amounts. This has lead to an adverse selection problem that if banks attempt to raise equity, cut dividends or borrow from other banks it is believed that they are a bad bank and lending is refused. So no firm tainted by MBS can raise capital. Good banks are driven out of the loan market by bad banks.
  
  Banks, of course, know this and attempt to move MBS off their balance sheets. But the problem of asymmetric information, where sellers have more information on the MBS than buyers causes the prices on MBS to implode. Buyers believe the securities offered for sale are low quality and offer prices that are below the true value or the ‘hold to maturity price’.
  
  The obvious solution is to independently verify the value of MBS, but this is costly, tedious and time consuming. So what can the government do?
  
  The Paulson plan is for the government take on the bad MBS. This saddles the government with the mortgage problems but does not convey any information to distinguish between the good banks and the bad banks. The same problem that good banks are indistinguishable from bad banks remains. Plus does anyone think the government can fix the mortgages underlying MBS? Those issues are best solved by the firms who created the mortgages.
  
  The solution is for the government is to impose rules on firms that eliminate the adverse selection problem that only bad banks raise capital. 1) All banks must suspend dividends. 2) All banks must raise equity capital. 3) Improve FDIC insurance to prevent bank runs. 4) Allow hold to maturity rules. Require MBS holders to provide the data and model used to value MSB to maturity so that investors can compare prices using various models. This will increase transparency for investors who can run the data through their own models to estimate prices.
  
  To directly improve liquidity to banking the government can take preferred equity stakes to improve banks balance sheets. Preferred stock becomes part of the company’s capital stock which increases the company’s capitalization. Also capital gains taxes on MBS can be eliminated so that investors are encouraged to take more risk in the MBS markets and corporate taxes can be reduced to encourage investment.
  

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  • Paul Killinger
  • 1025 Comments

  Oct 01 09:16 AM
  Why does it make me nervous that the government and the investment banks, the two institutions who got us into this mess, have come up with the solution to fix the crisis they created in the first place?
  
  

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