Posts Tagged ‘banks’

Good or Bad News?

April 10, 2009

Today, a source close to the Treasury Department said that no banks failed the government mandated “stress test” and would have to be shut down.  He went on to say that some banks would still need more capital injections.  The story is linked here.

While to the layperson, this looks like good news, to a supporter of the free markets, this is just more bad news.

First, the banks administered the stress tests themselves, and then submitted their results to the Treasury.  How are we to be certain they were being honest?  Of course, they would not want to show that they were going to fail, so why do we put any faith in this report?  If a bank came out and said, “we failed,” their stock would plummet and depositors would immediately withdraw their money.

Second, in the same statement, the source said some companies would still need more government aid.  So, doesn’t that mean these banks that need aid failed?  If they passed, they should not need any more propping up by the Federal Government.  If they still need more money, they can still fail, stress test or not.  That’s just common sense.

And finally, how can we be in the midst of one of the worst banking crises in the history of the US, and only a handful of firms have failed?  We have Lehman, Bear, Wachovia, and WaMu.  That’s it!  We need to weed out the bad apples, now.  We can’t keep propping up everyone.  The government is going about this all wrong, pre-emptively saving banks.  If the government should get involved, it should be after the banks fail, helping clean up the mess.  At least this way the rotten firms and bad assets would be liquidated, and we would be able to move on.

There is always more to the story than what the media and government reports.   Initially, the story might sound like good news, but if you read between the lines and put two and two together, you see that it is just a positive spin on more bad news.  The solution to our crisis is simple:  let the bad banks fail and liquidate the bad debts.  The sooner we allow this to happen, the sooner we will return to prosperity.

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Another Look at Our Banking System

April 7, 2009

With Wall Street and the Banking System at the heart of our current economic meltdown, I think it would be good to take another look at our banks in terms that are not normally used.  I’m not an economist, so this might be pretty crude, but it really is important to think about banks as businesses, and not failsafe financial institutions.

First, when you put your money in a savings account, you are not a “depositor.”  You are actually the lender, letting the bank borrow your money to invest.  Your return on this investment is the percent yield you earn on your account.  Banks then will lend this money to businesses or people who want to buy a home.  They charge these people a higher amount of interest than they are paying you.  This is called leverage, which is using borrowed money to make money.

The big question now, is why don’t we look at a bank’s finances and what they are planning on doing with our money when we put it in a savings account?  If we went to get a loan, they would look at all of our records and make sure we had a sound plan for the money.  We just deposit our money into any old bank without a question asked.

The main reason for this is the FDIC, which used to only insure interest bearing accounts (savings) but now insure non-interest bearing (checking) accounts as well.  They also just upped their limit from $100,000 to $250,000.  The reason the FDIC exists is to protect us, the depositors in a bank, in case it goes under.  As long as we have less than $250,000 in that bank, we know the Federal Government will make sure our money is safe.

The unintended consequence of this insurance is that the bank can basically gamble with the first $250,000 of every savings account.  They can put it in all sorts of speculative products because they know if all their investments go bust, the goverment will be there to pick up the tab.  It’s like me going into a casino knowing that if I lose my first thousand dollars, the casino will give it back to me.  The real world does not work this way.  Why then, do we think it’s alright for the people who are supposed to be keeping our money safe to do this?

If banks were not backstopped by the Federal Government, they would have to take less risks, or no one would deposit their money with them.  Without depositor money, a bank cannot make loans to make a profit.  Rather than just putting our money in Any Bank USA, we would make sure that they were making safe investments and know the risks that are involved.  This would weed out the speculative and aggressive banks before the seeds of a banking collapse are sown.

The idea of the FDIC sounds great to the consumer if we think of banks as the keepers of our money.  If we view them as borrowers and business partners, we see the FDIC program makes no sense.  It just allows the banks to gamble with our money and make the taxpayer pick up the tab when their bets go bad.  We need to stop relying on government institutions to protect us and to start making informed decisions of what banks we will lend our savings.  This will help stop bank speculation and keep them honest, and be a part of preventing a crisis like this from happening again.

Why Does Our Financial System Need Reform?

March 28, 2009

Treasury Secretary Tim Geithner and the Obama Administration are pushing for powers to regulate all aspects of the financial system.  These areas include hedge funds, private firms, and derivatives.  They also want the power to intervene with any company to make sure their collapse will not bring down the financial system.

While these ideas sound great, especially in the middle of the crisis we’re in, they are misguided attempts to intervene, when intervention is the last thing we need.  The perfect example of the need to get involved when it was not necessary was the Sarbanes-Oxley Act after the Enron case.  Everyone wanted regulation, so we strapped every publicly traded company with the huge burden of archiving every piece of data for 7 years.  However, the executives that were in charge of Enron were found guilty of fraud, and the company was bankrupted and dissolved.  The system for weeding out Enron worked, but our government felt the need to act, so they did.

In the current crisis, if we did not bail everyone out, would we need to regulate hedge funds, private equity firms, and derivatives?  Those were fringe investments to begin with, but since the Federal Reserve made credit cheap and easy to obtain, they became too large.  Warren Buffet even called the derivatives market the “financial weapons of mass destruction.”  If we let them fail and liquidate their assets, they would go back to being fringe investments only for specialty firms or the super rich people of the country.

By propping them up, we now have the need to regulate them.  By regulating them, we are acknowledging their existence as a major part of the financial system, when they should only be bit players.  Our system needs to be cleansed of these bad investment vehicles and instead we are implementing rules to legitimize them.

Also, the power to intervene with any company by the Treasury Department is setting a dangerous precedent for the future.  They want the power to take over a company and sell off assets before the company collapses.  Looking at how well the bailouts and toxic assets plans have gone, I question whether they really know what is best for our system to begin with.  Why not just let the companies go bankrupt and liquidate their assets letting the market set the prices?

Also, I question whether these reforms and protections will really help.  We all knew the derivatives market was a problem waiting to happen, and all of the financial geniuses who are now calling for regulation just sat back and watched.  The SEC had rules to prevent things like Enron from happening, but it still happened.  Madoff kept a ponzi scheme going for decades and the SEC couldn’t figure it out.  How can we expect our government to regulate when they have failed us so far?  If another bank does commit fraud or crooked accounting and it slips through the cracks, can we sue the government for their lack of oversight?

These broad government regulations just give us a false sense of security because we think the government is looking out for us.  That gives us the impression that they are watching what funds are doing, and they know that their investments are legitimate.  We fail to do our own due diligence because we think the government already has for us.  Then we will again be burned when the government fails to regulate like they promised.

We need to let the market liquidate the bad investments and let the companies that made these decisions fail.  Once that happens, we can see how widespread the problem was and if there is a need for sweeping regulations.  If anything, we need to regulate the Federal Reserve to make sure that our boom-bust economic policy comes to an end.  We can treat the symptoms (hedge funds, private equity and derivatives) only after we treat the cause of the cancer, which is the Federal Reserve.

The “Outrage” Over AIG

March 17, 2009

I find it very amusing that Fed Chairman Bernanke, President Obama and all of these members in Congress are so “outraged” by the AIG bonuses that add up to $170 million.

Aren’t these the same people who said we had to act swiftly and boldly to help avert falling into a financial abyss?  I know that Bush was still President then, but Obama and McCain both favored the massive government intervention.

This is what happens when you just say things like “protect the taxpayer” but you don’t take the time to read the bill to see if those provisions are really in there.

The AIG bailout was one that was not executed by Congress, but it is still their responsibility to ask questions and press the Treasury and Fed on what their plans are.  You can’t just let things happen and then get mad later at the outcome.

I’m more mad at the $170 billion we’ve given to AIG so far to keep it afloat.  They doled out almost $60 billion to all their big bank friends.  Why aren’t we outraged at that?  Why are we so mad about $170 million?  We need to stop focusing at the small stuff and AIG and start focusing on the bigger picture and the horrible job the Fed and Treasury Department are doing.

You’d think if you gave someone $170 billion, you’d keep good tabs on where it is going, right?  Wrong.  YOou would know that they are just handing over billions to their banking friends, right?  Wrong.  You think you’d actually put in provisions to protect the taxpayers and not just say you did, right?  Wrong.

The AIG bonus “outrage” is just a political ploy to make it look like our politicians care about us, and we’re taking the bait.  Instead of focusing on the mismanagement by the government, we’re making those big, bad greedy executives the scapegoat.

Now Congress wants to tax these bonuses to recoup the money.  However, some people got bonuses of $1000.  It’s more than just the top level that relies on bonuses for a big chunk of their salaries.  I don’t think the execs should be getting this money, but a secretary or administrative assistant?  Let’s take their money too.

This whole thing was a mess from the start and now we’re paying the price.  The government told us how we needed to act urgently and this is what happens.  When will we, the people stop buying it and stand up to this nonsense?

Thanks for Pointing out the Obvious Jon Stewart

March 13, 2009

This week Jon Stewart, the host of the Daily Show, has been making headlines for his ridicule and criticism of CNBC.  He even had Jim Cramer on yesterday and showed him clips of how wrong he was.  All Cramer could do was admit he was wrong.

Stewart even said he couldn’t find an analyst that predicted the downturn, but Peter Schiff was on CNBC many times and was dead right.  Stewart was probably too busy laughing like the rest of the people on CNBC to remember.

While Stewart is doing a good job of raising awareness that CNBC journalists, analysts, and companies do not always provide correct information, he is just restating the obvious.  Of course, it’s easy to show how wrong the people on CNBC were in the face of the worst stock market collapse in decades.  He’s just piling on harder than most people.

If Jon Stewart is so smart, where was he during the whole real estate boom?  Where was he telling us all that there was a commodities bubble when a barrel was at $140?  Why wasn’t he telling us that the stock market was going to crash?

If you want some advice from real economists you should visit www.mises.org, lewrockwell.com, campaignforliberty.com, and ronpaul.com.  Instead of some funny-man just criticizing CNBC and offering no solutions, you can learn about our economy, stock markets, and banking system and make decisions for yourself.

Bank Bailout a Failure Already

February 8, 2009

New Treasury Secretary, Tim Geithner, is supposed to announce his new and improved Bank Bailout Plan on Tuesday.  Supposedly, the gist of his plan is to have private investors buy the bad assets from banks, with the US Government setting a floor for the minimum return on investment.

So, basically, the banks will be able to unload their assets on investors.  Then, when the assets prove to be worthless, the Federal Government will backstop the deals.  This results in the losses being shouldered by you and me, the American taxpayer.

First, some comments on the plan in general.  Why will someone buy these assets if the government is already setting a floor price?  Why not just buy them for that floor price amount?

Also, this plan seems to allow the Wall Street firms and big banks to get out of this unharmed.  That makes no sense.  Why do they get to unload all their bad investments, but homeowners across the country are stuck with upside down mortgages?  Wouldn’t this money be better served attacking upside down mortgages?  Those are the root of the problem.  Bailing out the banks is just treating a symptom, but not the real problem.

If you step back though, and look at this from the bigger picture, you realize that this plan is going to fail already.  There should be one goal and one goal only right now:  Liquidate the Bad Debt.  Don’t move it around, don’t artificially set a higher price for it.  Just get rid of it.

If the banks had been required to declare bankruptcy before getting government help (like was done in Sweden), we’d be on our road to recovery by now.  The pain might have been a little worse, but it would have been short lived.

Instead, we have spent the last four months throwing almost $2 trillion around, with nothing to show for it.  We might have “staved off a financial collapse,” as the pundits like to say, but who’s to say it’s still not going to happen?  The bad assets are still there, and they are getting worse!  We might have just prolonged it by four months and dug a deeper hole from which we have to get out.

Currently, the actions of the government are making a bad situation worse.  We have attacked this crisis without any sort of plan, and we have changed course too many times.  When will we learn that we are going to have to take our medicine?  Actually, the American public already has.  We are feeling this more than the elite in Washington are!  How bad do you think Geithner is feeling this when he makes enough to owe $34,000 in back taxes?  That’s a lot of people’s yearly salaries!

We have learned to deal with this recession and just want it to be over.  Instead, our leaders are trying to make themselves feel important and are trying to “save us.”  Right now, we don’t need saving.  We need the government to get out of the way and let the banks fail.  After that, the Feds and investors can step in to help rebuild our economy.  Until they let that happen, though, we’re just in for more pain, more recession, and more government failure.

Stop Bailing These Guys Out!

September 19, 2008

Will someone tell me why the Federal Government is going to create a massive bailout for all the floundering financial institutions by taking on all their bad debt?  How is this going to solve anything?  Once again, the Federal Government and the Federal Reserve are just delaying the worst of the downturn til a later date.

When the Government intervened and negotiated a merger between Bear Stearns and JP Morgan  at a cost of $29 billion, everyone was saying that it created a “moral hazard.”  This hazard was that banks could take all sorts of unnecessary risks to make a quick buck, knowing that the government will bail them out.

If the Feds were going to take on all this bad debt – probably hundreds of billions of dollars worth – why did they spend the $29 billion on Bear, the $85 billion on AIG, the billions they have lent out through new auction facilities, $150 billion to other countries, and take on$300 billion when they took on Fannie and Freddie?  Why wouldn’t they have thrown the whole “moral hazard” thing out the window instead of wasting all this money?

To me, it looks like a disorganized group scrambling to appease Wall Street.  After all, the Federal Reserve, which controls the money supply was created by the investment banks on Wall Street to begin with.  Who do you think their allegiance is to?  You and me?  C’mon, get real.

If they are going to take on the malinvestments of all these banks, why shouldn’t they take over mine and everyone else’s mortgages?  Why do the banks get a free pass?  It just shows the state of our country.  The officials we’ve elected will let the Federal Reserve run amok and then have us pay to clean up the mess.

Now though, McCain and Obama are calling for more regulations and more oversight.  That’s a bunch of baloney.  There should be less Federal intervention and Congress needs to reign in the Federal Reserve.  Rather than regulating the banks, they need to regulate the money printing machine in Washington.

Let the markets work.  If we had done that, we would have had a small recession when the dot com bubble burst.  Instead, Mr. Greenspan decided to lower interest rates to 1% and triggered a boom of cheap money and easy credit.  Not only did he lower rates artificially, but he kept them there way too long.  Banks leveraged themselves way too heavily with complex debt instruments.  The entire bubble was caused by Federal intervention!

If a few banks fail and get bought by others, that’s letting the market weed out those that made bad investments and bad decisions.  By bailing out these companies, we are basically giving them all a free pass at the expense of the American taxpayer.  If you or I go to Vegas and take out a line of credit and blow it all at the blackjack table, we don’t get to just say “sorry” and walk away from it.  We have to pay it back or go to jail.  Why do Wall Street banks get to play by a different set of rules?

The guys in Washington who are printing the billions of dollars for these banks need to be pulled back by Congress.  In the Constitution, only Congress has the power to create money.  However, they passed this responsibility to the Federal Reserve.  Now, it is time for them to pull some of that power, if not all of it back.  In the end, they are still responsible for the actions of the Fed.  If it is my responsibility to pay the bills, but tell my wife to do it and she doesn’t, the lights still go off.  Just because I passed on the responsiblity doesn’t mean that I don’t have to face consequences.

Since we are using paper money that does not have any real value, Congress needs to limit how much money the Fed can print every year.  How much is enough?  How many billions of dollars can they create?  I know that they say they are “loans” but they are taking garbage debt as collateral.  They will be lucky to get pennies on the dollar.  That’s our money they are using, or losing to help out Wall Street.  Congress needs to put an annual cap on the money supply or stop the Fed from printing money altogether.

You realize that for every dollar the Fed creates, the value of the dollars in your bank account decreases.  In order to help the big banks, the Fed has thrashed the dollar and created inflation.  Sure, their numbers make it seem like there is no inflation because they take out food and energy.  Last time I checked, $3 a gallon gas and the rising food prices have caused me to relook at my spending habits.

Instead of putting band aids on the system, it needs a complete overhaul.  The Federal Government has to let the market work and let the banks go under.  If not, they will just keep creating new and more complex investment vehicles and taking more risks because they know the Fed will bail them out.  We need to hold banks to the same standards that we are held to.  The American government should not take money from tax payers and give it to a select few companies.

In this election year, we should not be voting for candidates that offer more government oversight and intervention.  It hasn’t worked so far and it won’t work in the future.  We need to stand up for an overhaul and tell the two major parties that we’ve had enough.  They talk about change and reform but their reforms are just minor tweaks to a system that is broken.