Gordo wrote:I think at this point everyone knows that most of the major banks (Citi, Merrill, B of A, RBS, etc) are insolvent. CEOs are leaving or being kicked out, they are laying off employees, governments are propping them up and nationalizing them.
What I don't see being discussed much is what are the potential roads forward from an insolvent banking system? Is it POSSIBLE that new banks will be created (government owned or otherwise) and the economy can function without the old/dead entities? I haven't seen ONE PERSON even talking about this possibility, or what the implications would be. Why would lending have to grind to a halt when the US government can create any amount of money at any time out of thin air? They already took over fannie and freddie, so the structure is in place for them to lend as freely as ever. (By the way lending has NOT ground to a halt, standards are just being enforced, which is a good thing).
Everyone is assuming since Bernanke, Paulson, Obama, and Congress (the majority anyway) all seem to think its a good idea to continue to toss money down the black hole of insolvent banks (so much for change you can believe in!), is there any reason to believe they would NOT nationalize the banking system? Again, what are the implications as far as inflation and debt to GDP? We already have massively increasing money supply countered by rapidly decreasing velocity - which one wins over the next 1, 2, or 3 years? What would happen if they did NOT continue down this path and instead let these institutions fail? Would it create total panic as money markets cratered and bond holders at these institutions got wiped out?
Finally, why do so many bearish commentators assume the market can only go down? The market does not trade on things that already happened (like last quarters earnings) as much as what market participants believe WILL happen. While the great depression era had the most devastating overal market declines ever, it also had more massive rallies than at any other time in the last century. I laugh every time I see John talking about how a stock market crash is imminent because last quarter's earnings sucked so bad. As earnings go to zero, P/E heads to infinity - that alone is NOT a short term trading tool of ANY value whatsoever.
Not to play on words here, but we will only know for sure that the banks are insolvent and how insolvent they are if there is a complete audit, and that will only measure the degree
of insolvency at the time it is done. As Hussman said, the situation is evolving daily. As far as how many have surmised that the banks are insolvent and believe it as
of this moment, I would guess it's less than 1 in 10,000. I doubt 1 in 100 even know what the word insolvent means or know the ramifications
of insolvency. I doubt Obama himself ever even considered the issue until recently.
As far as the way out, I only know
of one way out. This is my understanding
of history and how banking works. Time is off the essence in a case like this. When JP Morgan found out Knickerbocker might be insolvent, he was on vacation and hightailed it back to New York. A group was mobilized to examine balance sheets immediately. Any bank that was insolvent and, I don't know there may have been some minor ones besides Knickerbocker, were shut down immediately. Those that were solvent but illiquid were bailed out, and that contained the panic. To my way
of thinking, it is impossible to bail out insolvency because it spreads insolvency. In my opinon, bailouts in any form, printing money or otherwise, take capital from solvent, profit making enterprises and destroy it, the profit making enterprises themselves and the livelihoods
of the workers employed in them.
So there is no way forward other than what Morgan did in my opinion. The Fed could have done the same thing if they had audited the books
of the banks, but I don't believe that happened.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
