Tuesday, August 5, 2008

A Shock to the Collective Psyche: Bad News and Bank Runs

The Bush administration is going to be mailing out more "stimulus" checks in the very near future. There's just no way around it. The Fed is in a pickle and can't lower interest rates for fear that food and energy prices will shoot into the stratosphere. At the same time, the economy is shrinking faster than anyone thought possible with no sign of a rebound. That leaves stimulus checks as the only way to "prime the pump" and keep consumer spending chugging along. Otherwise business activity will slow to a crawl and the economy will tank. There's no other choice.

The daily barrage of bad news is really starting to get on people's nerves; it's obvious everywhere you look. Most of the TV chatterboxes have already cut-out the cheery stock market predictions and no one is praising the "impressive powers of the free market" any more. They know things are bad, real bad. That's why the business news is no longer presented like a happy-go-lucky Bollywood extravaganza with undulating females and exotic music. Now it’s more like B-grade slasher movie where everyone winds up dead at the end of the show.

A pervasive sense of gloom has crept into the television studios just like it has into the stock exchanges and the luxury penthouses on Manhattan's West End. It's palpable. That same sense of foreboding is creeping like a noxious cloud to every town and city across the country. Everyone is cutting back on non-essentials and trimming the fat from the family budget. The days of extravagant impulse-spending at the mall are over. So are the big ticket purchases and the trips to Europe. Consumer confidence is at historic lows, disposal income is a thing of the past, and credit cards are at their limit.

In the last three months bank credit has shrunk faster than any time since 1948. The banks aren't lending and people aren't borrowing; that's a lethal combo. When credit-creation slows, the economy falters, unemployment rises and the misery index soars. That's why Bush will mail out a new batch of stimulus checks whether he wants to or not; his back is up against the wall.

On Friday, after the market had closed, the FDIC shut down two more banks, First Heritage Bank and First National Bank. Kaboom. Two weeks earlier, regulators seized Indymac Bancorp following a run by depositors. The FDIC now operates like a stealth paramilitary unit, deploying its shock troops on the weekends to do their dirty work out of the public eye and at times when it will least effect the stock market. The reasons for this are obvious; there's only one thing the government hates more than seeing flag-draped coffins on the evening news, and that's seeing long lines of frantic people waiting impatiently to get what's left of their savings out of their now-deceased bank. Lines at the bank signal that the system is broken.

Banks-runs are a shock to the collective psyche. When depositors see a bank run they realize that their money is not safe. People aren't fools; they can smell a rat. When their confidence wanes, it extends to the whole system. Suddenly they start questioning everything they once took for granted. They become skeptical of the institutions which, just days earlier, seemed rock-solid.

Bank runs are a direct hit on the foundation of the free market system. Unchecked, the tremors can ripple through the entire society and trigger violent political upheaval, even revolution. The public may not grasp their significance, but everyone in Washington is paying attention. They take it seriously, very seriously.

An article in the San Francisco Business Times said that the FDIC is worried about the reporting on Internet blogs. They'd rather keep the information about the troubles in the banking system out of the news. Sheila Bair, chairman of the Federal Deposit Insurance Corp., summed it up like this after the run on Indymac:

"The blogs were a bit out of control. We're very mindful of the media coverage and blogs in controlling misinformation. All I can say is were going to continue to stay on top of it. The misinformation that came out over the weekend fed a lot of depositors' fears."

Is that a threat? The cure for a failed banking system is adequate capital and prudent oversight not threats to impartial critics of the system. That's balderdash. Commissar Blair apparently believes that bloggers should be treated the same way as journalists in Iraq, who, if they veer ever so slightly from the Pentagon's "the surge is a great triumph" script, find themselves on the smoky end of an M-16 at some unmarked checkpoint outside Baquba.

Last Sunday, sought Treasury Secretary Henry Paulson tried to reassure the public that the banking system is sound, while bracing people for more trouble ahead:

"I think it's going to be months that we're working our way through this period — clearly months. But again, it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

Paulson is wrong; the banking system is not sound nor is it well capitalized.

If the rate of bank closures continues at the present pace, by the middle of 2009 their will be restrictions on withdrawals. Bet on it.

Journalist Bill Sardi summed it up nicely in an article last week on lewrockwell.com titled "Could Your Bail Fail?":

So, while your bank still has money and can process your checks, it may be time to pay down debts, pay quarterly taxes and mortgage payments in advance, and think of having money outside of banks (gold, foreign currencies), etc., before your money is inaccessible or even evaporates! Don’t think all your investments outside of banks are immune from all this turmoil. For example, money market mutual funds, where Americans have invested $3 trillion, are not covered by FDIC insurance (however, money market accounts offered by banks are covered). Recent losses in some of these money market mutual funds have caused some companies to rush to plug the losses. For example, Legg Mason Inc. and SunTrust Banks Inc., recently pumped $1.4 billion each into its money market funds. Bank of America Corp. has injected $600 million.

As for your checking and savings accounts, recognize you may have five different accounts in the same bank, but the FDIC only insures individuals, not each account, up to $100,000. Putting your money in different accounts in the same bank does not necessarily provide better insurance for your deposits.

Mike Whitney lives in Washington state and can be reached at fergiewhitney@msn.com

Mike Whitney is a frequent contributor to Global Research. Global Research Articles by Mike Whitney


About Global Research:

The Centre for Research on Globalisation (CRG) is an independent research and media group of writers, scholars, journalists and activists.

The CRG is based in Montreal. It is a registered non profit organization in the province of Quebec, Canada.

In addition to the Global Research website, the Centre is involved in book publishing and educational outreach activities including the organization of public conferences and lectures. The Centre also acts as a think tank on crucial international and geopolitical issues.


Anonymous said...

>>> Everyone is cutting back on non-essentials and trimming the fat from the family budget. The days of extravagant impulse-spending at the mall are over. So are the big ticket purchases <<<

Ahhhh yes, but is this such a bad thing? We ALL need to stop spending forward and start to live within our means. We bought into the thinking that we can have whatever we want if we just 'charge it'. Our kids are having difficulty because for the most part, they were born into our disposable, impulsive society. This has really done more harm to us as a society than it has good. It has also had a negative impact on our environment, as we pile waste higher and higher into landfills. It is time to turn this around.

Another benefit- look at how much LESS gas has been purchased since Big Oil decided to go full speed ahead and screw us. Sure...OPEC gets blamed, but OPEC controls less than 1/3 of oil production on the planet.

Gas prices are coming down...supply and demand. We need to keep up the good work, conserve and continue to press for independence from this tyranny. Brazil has done it. Our politicians are in bed with special interests who bleed us dry.

This winter will be our wake up call...the breaking point for many of us. cut back on gas consumption. This will slash the tax dollars generated for roads, etc. Cut back. Cut WAYYYY back. We will be heard. We must be a bigger voice than ANY special interest group out there. I firmly believe this.

Anonymous said...

More doom and gloom from the doom and gloom network!

Anonymous said...

"Anonymous said...

More doom and gloom from the doom and gloom network!
August 5, 2008 4:19:00 PM EDT"

I can't help think that you are a full grown adult and still live at home. Are you Michael Handwerk?

Anonymous said...

Brok brok, the sky is falling, the sky is falling, brok brok.

Jeez... if you are using "Centre for Research on Globalisation" as your source of news, you must be wearing your tinfoil hat while reading it. It sounds like a George Soros funded left wing kook group.

The stock market was up 331 points today, oil has fallen from $147 to $118 over the past few weeks. The stock market is not too worried.

Do you realize that there have been EIGHT bank failures in 2008 through July?

And back in 2002, through July, there were.... EIGHT bank failures.

And we survived!

In fact, in 2005 and 2006, there were NO bank failures AT ALL - the ONLY two years since 1934 that there have been no bank failures. Was any credit given during those years or is only blame dished out?

In 1988 and 1989, there were over ONE THOUSAND bank failures! And you are crying about EIGHT!

Anonymous said...

Why does Michael Handwerk get criticized here? He can't do much about his age, and he WAS elected, after all.

I've been reading these blogs and there is a LOT of gloom and doom going on here. I asked several people in town about the CDC thing and surprise! The same level of gloom and doom seen on these local blogs is not evident in the real world.

My advice? Get out into the SUN people. You need some fresh positive air in your lungs!

Anonymous said...

"My advice? Get out into the SUN people. You need some fresh positive air in your lungs!"

Yep, that will happen when the sheriff sells the house to the highest bidder to pay the real estate taxes!

Karen said...

"Forwarned is forearmed."

Surely most have heard the above phrase, and it is one of the many old adages with the wisdom of the ages which I am wont to pass along to family and friends.

Some information is not for all the readers of this blog. If you do not consider certain material posted on my blog to be of benefit to you, I politely invite you to pass it by.

Some threads are obviously not for everyone.

For those who find this type of information vital please search for and read the Financial Times. Former Fed Chairman Alan Greenspan warns of more bank failures to come.



You bet.

However, forwarned IS forearmed.

Think about it.

Karen said...

This is a big, big, deal, folks, but you're not likely to find much information on the investigation. A bit long but worth the read.

"..."no Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing".

IMF finally knocks on Uncle Sam's door

June 30, 2008

IMAGINE the Reserve Bank of Australia, concerned that its friends in the city of Sydney (but perhaps Melbourne) who, having wallowed in wealth all their adult lives, were no longer gainfully employable and their wildly extravagant lifestyles were in danger, and, having the powers to intervene in the market, decided to do just that on their behalf.

Imagine them offering to enter the market and buy shares that would prop up the foolish gambles of the bankers, gambles they had encouraged them, until recently, to take by providing them with cheap money.

On top of that, they told this group they would provide hundreds of billions of dollars in credits to these same profiteers on the grounds they were so big and important to the economy they were indeed too big to fail.

Then, imagine, despite pouring untold taxpayers money into stocks and allowing their cronies access to vast sums, the system continued to fail. So they announced they would need greater power and with it more secrecy.

For its growing band of critics has, perhaps unwittingly and in the interest of public good, this has become the principal function of the US Federal Reserve.

If this was to happen in Australia the International Monetary Fund would be hammering at the door of the Reserve Bank. But Australia does not have a President's Working Group on Financial Markets, commonly known as the Plunge Protection Team, that allows the US Government to prop up the markets by buying shares. But to imagine the IMF investigating the US financial system is unthinkable, or was. But, at the weekend, Der Spiegel reported that the IMF would conduct a full investigation into virtually every aspect of it.

Der Spiegel wrote that the IMF had "informed" Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

This, Der Spiegel wrote, "is nothing less than an X-ray of the entire US financial system", adding that "no Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing".

The fact that the IMF is knocking on the very doors of its parents and waving legal papers about who lost the house, the car and the kids will, if the past is anything to go by, be buried in the US by pom-pom waving on CNBC telling all what a great time it is to buy.

But the news that the US Fed has now lost its last vestige of credibility did not end with the German report.

The Telegraph from London weighed in, following the Royal Bank of Scotland's statement last week (also lost on the US public) that it was time to head for the crags, and reported Barclays Capital's closely watched Global Outlook analysis that said US headline inflation would hit 5.5% by August and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral.

If the Fed hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it," the report found. "They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility."

Der Spiegel reports that the IMF is threatening to seriously study the accounts of America, something President George Bush is determined to prevent at least while he is in the White House, informing the IMF that it can begin its investigation but cannot complete it until he leaves office.

But the reckoning will come and it will shine a light in places where light has been desperately wanted for all too long.

"As part of the assessment," Der Spiegel said, "the Fed, the Securities and Exchange Commission, the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests - worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar."

Under its by-laws, the IMF is charged with the supervision of the international monetary system. About two-thirds of IMF members - but never the US - have already endured this painful procedure.

Australian banks have been buffeted by the storms generated in the US, but strict standards enforced by a Reserve Bank that is independent of private banking interests has prevented such excesses, as vouched by their performance as compared with the broker-trader banks and the retail banks of the US. Shares in once-massive banks and brokerage firms have been stripped by as much as 70%, 80% and even almost 100%. We are taking a trim while US banks are getting a full haircut and shave.

Part of the problem is the US media, which has for so long pretended that all is or soon will be well, a bottom is near, a recovery awaits in the second half of the financial year that will sweep away all problems, sown over decades, in a new expansion, a cycle that is ordained to come. The latest fantasy is that with the quarter's end, new profit figures will invigorate the bull, which will seed fertility.

The next President will be handed at least two wars gone horrible wrong and, by then, an economy in similar shape. The bull will have to be a particularly fertile beast.

Der Spiegel reports: "When the final report on the risks of the US financial system is released in 2010 - and it is likely to cause a stir internationally - only one of the people in positions of responsibility today will still be in office: Ben Bernanke."

While Der Spiegel claims that IMF intervention (my expression) is a humiliation for the US, the real significance may be that this is another blow to American exceptionism.

While the examination is far reaching, and deeply intrusive, Canada, Britain, Italy, indeed two-thirds of IMF members, have participated in the program. The new President will soon discover the age of US exceptionism is over.

Meanwhile the US markets have entered bear territory, the economy has done likewise and we are at the beginning of a long and tortuous process before rebuilding can even commence.

David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news pubisher.


Anonymous said...

Don't you ever question why these doom-and-gloom-for-the-USA things you post are always from foreign niche groups/publications/web sites?

Karen said...

As a matter of fact, I do, Anonymous 1:21.

Perhaps part of the answer is the manner in which the current White House resident and administration keeps all situations "under control" and secretive.

And, contained in the article is the following, which you may have missed.

"...if the past is anything to go by, (the news will) be buried in the US by pom-pom waving on CNBC telling all what a great time it is to buy.

Who would be the loudest and most truthful voice I wonder...