As Banks Go, So Goes the Economy
Greg Hunter’s USAWatchdog.com
FDIC Chairman Sheila Bair gave a speech to the securities industry in New York City this past Wednesday. In her opening remarks, she said, “Now, as a tentative economic recovery continues to build, and as the earnings of banks and other financial companies begin to recover, we must resist the natural impulse to return to business as usual. Instead, now is the time to carry through with our work to strengthen financial market practices and products and sharpen our approach to financial regulation.” Apparently, the Financial Standards Accounting Board (FASB) wants to do just that and return to fair market accounting. You may remember, since April of 2009, FASB changed the rules on how banks value their financial holdings. When it comes to things such as real estate and mortgage-backed securities, banks can value those holdings at whatever they think they will get in the future. Since the rule change, hundreds of years of accounting protocol have been trashed, and instead of “mark to market” (valuing an asset for what it will bring today), you have “mark to fantasy.” Professor of Economics and former regulator William Black says FASB turned the accounting rules “into a farce.” (Click here to read more from Professor Black.)
I am convinced without this rule change, most of the big banks would be insolvent. Instead of record breaking Wall Street bonuses in the last 2 years, there would have been pink slips and receivership for the big banks. This would have been far cheaper for taxpayers, and we would be beginning a real recovery by now.
It now appears FASB wants to change the rule back to “mark to market” accounting. CNBC reported this week, “Another ongoing regulatory process is FASB’s proposal to substantially revise the accounting standards for financial instruments. Under the proposed rule, banks would be required to measure substantially all of their financial instruments at fair value on the balance sheet.” (Click here to see the complete CNBC story.) So how does Chairman Bair greet this news? She said this in her speech this week, “In short, we do not believe that a bank – whose business strategy is to hold loans and deposit liabilities for the long term – should be required to measure them at fair value on the balance sheet. Why? Because fair value does not necessarily reflect the manner in which the cash flows associated with these instruments will be realized or expended.” (Click here for Bair’s complete New York Speech.) Does Bair actually think toxic mortgage debt is going to be worth more in the future? You have to be kidding. The Fed recently said it sees more than 4 million foreclosures through 2012! (Click here to read more on this story.)
And, if you look at the number of the banks the FDIC is closing, I do not see how she can say we are in a “recovery.” So far this year, the FDIC has closed down 146 banks. That is more than all of last year, and according to JSMineset.com, that number is “artificially low.” JSMineset.com reports, “The FDIC’s closure of 38 banks over three months is by no means an insignificant number. However, in the context of the FDIC’s overhang of troubled banks, it suggests the pace of bank closings is being kept artificially low. As of April 2010, there were about 425 banks operating under serious FDIC enforcement orders that called into question the banks’ solvency. Since then, upwards of 25 new banks have come under such orders each month. . . . That backlog could only have grown.” (Click here for the JSMineset.com article.) Do you think Chairman Bair would want bogus accounting rules to make banks look more solvent than they really are? I can think of no other reason. By the way, the main stream is completely ignoring the FDIC bank failure story.
In his latest report, economist John Williams of Shadowstats.com says the entire U.S. financial system is in deep trouble. This is why the Fed started another round of QE to the tune of (at least) $600 billion over the next 8 months. He says the money printing is, “. . . in response to mounting U.S. fiscal and systemic-solvency problems intensified by a still-unexpected “double-dip” recession, as well as in response to intensifying selling and dumping of the U.S. dollar and dollar-denominated paper assets in the global markets. . . . The U.S. government effectively is bankrupt and remains extremely likely to resolve this ultimate sovereign insolvency by printing money to meet its obligations. As global pressures force the Fed into further Treasury 2011 debt monetization, as global confidence in the world’s reserve currency evaporates, risks remain particularly high of a U.S. hyperinflation beginning to unfold in the first-half of 2011. . . along with severe economic, social and political consequences that will follow. The outside timing for this manmade financial catastrophe remains 2014.”
Just as in the Great Depression, as the banks go, so goes the economy–and the banks are headed down.
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About the Author
Greg Hunter
Greg is the producer and creator of USAWatchdog.com. The site’s slogan is “analyzing the news to give you a clear picture of what’s really going on.” The site will keep an eye on the government, your financial interests and cut through the media spin. USAWatchdog.com is neither Democrat nor Republican, Liberal or Conservative. Before creating and producing the site, Greg spent nearly 9 years as a network and investigative correspondent. He worked for ABC News and Good Morning America for nearly 6 years. Most recently, Greg worked for CNN for shows such as Paula Zahn Now, American Morning and various CNN business shows.
duh. non starter. next.
I saw Inside Job yesterday. A documentary film about the foreclosure mess and how it happened..Deregulation was the culprit along with greed at the highest levels. It’s quite different than what FOX, CNN and the mainstream media would ever show. What struck me most was the complete lack of regret the enablers of this mess expressed. Another aspect I wasn’t aware of was the role academia (Harvard, Columbia, Brown)played in getting the laws changed that allowed for this mess to be created. And these men and woman are still being sought for their advice (collusion is more like it)….
It was fraud plain and simple and none of these people at the investment banks will ever see the inside of a prison. At the end it was noted how the current administration is acting as an enabler and nothing really has changed. As though its their role to see that things are left as these free market, privatize the profits socialize the losses crowd wants them. Disgusting, absolutely disgusting.
I left thinking, why do people believe this past election with the changing of the guard, is going to solve the problems of our country. Theyre all in bed with the corporations that have taken over our government. Just different sides of the same coin. These supposed saviours, the Tea Party candidates, will soon realize they either play along or they’ll be replaced. Is it going to take another country to step in to clean us up like what happened in Germany after WW2? I don’t see the willingness to do whats right for the country. All that matters is money and who can acquire the most.
Robert,
Thank you for this excellent review and comment.
Greg
Greg, we might as well face it, the powers that be will continue to
do what they want in the interest of the wallstreet-washington elite. Buy locally, buy american made, assembled, produced, & manufactured only and this thing will turn around. Have you ever heard one person running for government ask the people to buy american? Is is un-american to want your neighbor to keep his job?
Wake up american you are being taken offshore with the jobs.
Thank you Art.
Greg
But our jobs are also going to the lowest bidder within the US, too, as I learned last week. What happened to me is happening in health care all over the nation. I was a medical transcriptionist. Fifteen of us lost our jobs, three IT people, and about 20 medical records personnel. Wait, wait – we were offered jobs, but the rate is so low that I would make, at most, $5/hr, down from $20-30. Also, the new company will not pay us for any “macros” – for ex, first paragraphs of CT scans or MRIs that we insert to these reports. That’s like telling a surgeon s/he won’t be paid for the initial incision, just the fiddling around inside. I was an independent contractor, which is what most MT’s are, so we can’t collect unemployment. Sorry to vent, but this kind of stuff is happening in other industries in the US as well.
A friend tells me one university considered outsourcing teaching jobs to a lecture supplier at a fraction of what it costs to pay a professor. It is unbelievable. Decent-paying jobs are being destroyed HERE. And then they propose that we work until we’re 70 in order to save Soc. Sec.
Deborah,
It is all part of our declining economy and it will hurt all of us. Thank you for your comment and your insight into the medical world.
Greg
For several years, now, Williams has been steadfast in his dates – constant, or foreshortened – for hyperinflation onset. He has published much economic data at odds with the establishment. No one to my knowledge has called him out.
We must remember – hyperinflation is not just high inflation. Hyperinflation frequently results in the agonizing death of a currency.
Because of our outsized economy, hyperinflation in the U.S. should be a doozy.
Thank you John.
I quote Mr. Williams a lot on this site and he is rarely wrong on the facts. Thank you for the comment.
Greg
Will someone please explain to me: How is QE2 different than all the money printing that has been going on until now? If the US Treasury has an annual deficit of anywhere from one to two trillion dollars, where has the money to cover that come from? China? Wasn’t there some sort of stealth QE going on for that?
Stanley,
I always use the term “money printing” right along with the term QE because is the simplest definition that is what QE is–money printing. Technically the printing is electronic via computers and servers. Still, Federal Reserve Notes are created out of thin air. Trends expert Gerald Celente says the money, “is not work the paper it is not printed on.” Stanley, the Fed is just printing money to cover the expenses of the United States for the next 8 months (at least $75 billion a month.) This is why the second round of Quantitative Easing has the world waking up to the fact that the U.S. is broke and now just printing money to pay for continued bail outs and expenses. Thank you for your comment. I think you are seeing things in the right way.
Greg
Once a person sees the collusion it took to accomplish this massive theft, he/she can then understand that we are dealing with financial warfare, not merely an incidence of fraud or a ponzi scheme. As Max Keiser points out to the victims in places like Ireland and Iceland, etc, this is the equivalent of military occupation. Max is also telling us how to fight back. This is no joke, it can work: Crash JPMorgan -buy physical silver. Go to maxkeiser.com for details. Also note the organizing in France to start a run on the banks. We have the power to fight these greed-demons. Silver is cheap… but not for long.
Good advice Gary B.
Greg
It’s gratifying seeing others becoming more aware of their duty to act to ensure their presently attained safety and to ensure future security. History obligates us to so act in every civil manner at our disposal!
Allby,
Thank you for all your comments.
Greg
Eventually a people need be willing to surmount natural human limits. Don’t expect more from what is less.
The USA is bankrupt. So what? The USA has been bankrupt since the 70s, when Nixon reneged on its liabilities to deliver gold in exchange for paper dollars.
It doesn’t matter whether the USA is solvent or not – what matters is whether everybody else BELIEVES (or at least appears to believe) that the USA is solvent.
And, yes, when the rules don’t suit the powers-that-be, the rules get changed. That’s not a surprise, either, is it? That’s how they took down the Hunt brothers, that’s how they “solved” the S&L mess…
Thank you Vess and Jeff for the comments.
Greg
Shelia Bair continues to high marks from the press for her leadership and direction on the banking community. She gets face time on “60 Minutes” and all the talking shows and praise from the Obama administration.
The fact she continues to shill for the big banks by not holding them to the same standard as the average household in America in asset value is a crime! It would not be so bad if these robbers on Wall Street did not take our tax money in bonus on these artificial balance sheets Bair lets them get away with! Why do we toss people out of homes that the same banks value at market value but as long as they make their monthly mortgage payment the banks value the same home at purchase price. It that is the case, then the home owner should be able to get a home equity loan ON THE BANKS MARKET VALUE! Try to get the banks to open their books on this one!
I also find it so strange none of the new Republicans & Tea Party people are on this issue……………..WHY?????? It is issue their BIG BANK DONORS won’t let them touch! The whole system is corrupt!!!
Dear Greg,
In accounting textbooks FASB was constantly cited. I had instructors who worshiped the feet of FASB, whilst we students were constantly pounded with the “honesty and integrity” of the Board. Any respect I had for FASB was lost when they changed their “mark-to-market” rules in order to feed the real estate bubble.
As to the current “hyperinflation,” we’re already in it, so we can’t turn this canoe away from the waterfall. I say, let’s enjoy the ride. Like Argentina, we can take our highly-inflated dollars and pay off our homes – “big banks” will ultimately be screwed!
Sam,
I hope and pray you are right. Thanks man.
Greg
Greg, The Cartoon is so close to reality its scary
Jill,
I try not to be totally gloomy. Thanks.
Greg
So some people on Wall St are going to be busted for insider trading. What about the people that destroyed our economy through this foreclosure, CDOptions, CDSwap derivatives mess? When are they going to be frog marched for the whole world to see? Or is the insider trading bust going to be the extent of it and serve as an appeasement?
http://www.huffingtonpost.com/2010/11/19/us-insider-trading-sweeping-charges_n_786335.html
Although insider trading most likely occurred as a result of the fraud being perpetrated from this foreclosure mess, the greater story is all the big name CEO’s of the banks and their immediate underlings and people at the FED and Treasury that knew what was going on and literally allowed the banks to be destroyed for short term profits, fully well knowing the FED would rescue them and hand the American people the bill.
Those guys and the brokers were all compensated based on profits and still are… But yet we just had an election that was based on one party demonizing the other when it should have been about which party is going to aggressively go after the people who destroyed our economy and how that party is going to do whats right for the USA and put their party politics aside…Issues don’t matter anymore.. Our political system has become like sports with one team wanting to destroy the other and at the expense of good governance..
PS – Lets not forget that one of the reasons for QE2 is to get people out of bonds and into stocks by making the bonds have less desirable interest rates.
Thank you Robert for the comment and the link. I think you are on target with your thoughts on the bond and stock markets.
Greg
Greg, was reading some info that Matt Taibbi recently published about this insider trading probe…
http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/236328/83512
Apparently this investigation has the potential to go deeper and broader if the DOJ takes it there. That’s the key here, will the DOJ take this investigation where it should go meaning the biggest names on Wall St or for political purposes to protect future campaign donations to the Democratic Party , will the DOJ claim nothing here of any consequence and then claim the investigation was completed, no significant wrongdoing occurred?.. Im sure Taibbi will have more to say on this in the future.
Robert,
Thank you for the comment and content. I read the Taibbi story and it is good.
Greg
The goal of Obama is to close as many banks as possible so we can have 1. You cannot globalize the world with multiple banks. This is the goal of Obama and Czars. While they have us fighting and scrapping over health care, tax, abortion and borders Obama & Barney Frank are closing banks.
Everyone is worried about being implanted with a chip. YOU ALREADY HAVE THE CHIP. Most giving off a signal out of your wallet as we speak. Better take the streets and start protesting or it will be over soon. Ive done everything I can but get arrested which I am sure will happen soon. I’m a problem for this World Goal.
PatriotWatch,
You make a good point with the “wallet” comment.
Greg
As I understand it, the FED doesn’t directly buy treasury bonds. The banks buy the bonds and deposit them with the FED. The FED then credits the banks with a time deposit.
Therefore, if the banks used mark-to-market accounting, they would lack the capital to buy the treasury bonds due to obvious insolvency. With reduced bond sales, the government would be faced with either directly print currency or suffer severe austerity measures.
Direct printing of currency would send a clear message that we are insolvent and we would get voted off the island. With the majority of our manufacturing base having been moved off-shore to hold retail prices low masking inflation, corporate capital tied up off-shore and tight credit conditions, we would face serious shortages of manufactured goods for years or decades. Please recall Econ 101: supply and demand v pricing of goods.
Government austerity would plunge hundreds of thousands of families into the unemployment pool. With austerity we are faced with no monies for unemployment insurance, welfare or other handouts. Can we spell chaos? Another factor to consider with these gov’t workers is, what job skills do they have outside of administration? No marketable skills in production/manufacturing equates to long-term unemployment. Few have the financial resources to return to college and gov’t austerity removes the ability to get a college loan.
That the FDIC hasn’t seized more insolvent banks is more about public confidence in the banking structure and the FDIC’s balance sheet in the red.
The general public is heavily in debt. Bills aren’t getting paid and cash flow aka velocity of money removes tax monies from the gov’t accounts recievables. The accounts payable remain. Either the gov’t refuses to pay accounts payable maintaining capital or “go to direct printing.” Catch 22.
We can call our economic system a Ponzi scheme or whatever. The reality is our economic system is based upon a transactional currency. The intended purpose of our currency is as a short-term vehicle. Inflation and the tax code structure enforce its use as such.
Consequently the primary investment that the public ought to be investing in is self-reliance by diversification of job skills into manufacturing, maintenance and resource extraction. Ain’t gonna happen until … .
I have met the enemy and it is us.
Thank you OTE and Cicero. Good stuff.
Greg
Fundamentals are irrelevant in a world turned over to the likes of Edward L. Bernays (see:Propaganda, pub. 1928) and B.F Skinner (see:Beyond Freedom and Dignity, pub. 1971) both men funded and supported by the ‘wealth=power’ crowd. The hallmark of true nobility is honesty… ‘my word is my bond’. When lying, cheating, and stealing become the ‘accepted norm’ in any culture; that culture is destined to crumble, unless by some miracle, everyone begins to demand of themselves and their fellows ‘…the truth, the whole truth, and nothing but the truth…’. Dickens’ Tiny Tim:”God bless us every one”.
Whether for reasons of continuing the bailout of the big banks or to pay the US gov operating expenses… QE money-printing could very well continue without consequences in the short to immediate term if the Euro goes belly up.
Kinda like a case of two guys being chased by a bear, and one realizing that it isn’t necessary for him to outrun the bear, but merely be faster than his companion.
Lane,
All I can say is “Run Forest Run.” Yes, a sick Euro could buy the buck some time. Thank you.
Greg
National self-sufficiency is the only way out. Will our appetite for instantaneous fame and fortune continue to drag us down?
Allow me to give my perspective on how we got to this point.
I’ve been in the telecom business as an engineer for several equipment vendors for over 30 years. Our goal in life, simply stated, was to make our customers continually more profitable. Translated into English that meant helping to reduce head count.
My first visit to a Central Office (CO) was really exciting. A building of 1,000’s of square feet, filled with 100’s of people everywhere, and functioning like a well oiled machine. The sound of step-by-step switches and the like was in the air, hammering out what would soon be interpreted as the sounds of productivity and the soon to be past. I was there to replace all that with the technology of the future.
Years later I made a similar pilgrimage to another huge CO. However, this time I found once filled real estate filled with men, women and machine, virtually empty except on one floor that was partially filled with equipment similar to what we made just a few years ago. We wer once again there to replace equipment made by a competitor that was not deemed to be “productive enough”. Our new equipment was the “latest and greatest” with computerized man/machine graphical interfaces and supporting even higher transmission speeds, but most importantly it was “Cheaper by the Dozen”.
That CO visit really bothered me. It raised questions that have fermented in my mind for 20 years or more that have changed from concerns to reality. Basic questions like:
Where did all those talented people go that once populated the COs day and night, making sure our phone calls always got through?
What kinds of jobs do they fill now?
Were they able to find employment at similar pay scales?
Why does this concern me, my company, or our customers?
The last question is perhaps the simplest to answer. They are us!
My customers at the time, the telcos specifically, have been operating from, IMHO, a flawed business plan. They continually want more for less, cheapening the technology and skill set of generations “going forward”, that made TODAY possible. Part of the telcos’ rationale for their actions is to be able to provide advanced services to the masses. But what about the mass of former telco workers, with outdated skill sets and most likely living on reduced incomes? How much of their budget is allocated to those “advanced services” that the telcos sell at a premium.
So there you have it. We are living in a zero-sum-gain regime, so go get yours while you can and survive. History says improvement will only come after heads roll!
Lary,
Great analysis and perspective on both comments.
Greg
Cisco CEO apologizes to shareholders, names biggest competitor as Huawei.
Bigger problem is lack of loyalty. No one is forcing telcos to buy Chinese! But they can’t line their pockets with Gold fast enough if they buy American.
We’ve had fiberoptic technology available at low cost for 20 years. Why can’t I get it at home? Because government and telcos conspire to squeeze every last penny out of antiquated T1 technology! I’ve watched telcos demand the use of technology in systems that is mostly available from foreign suppliers. As good as it is, there has been good home-grown technologies that have been ignored or copied by foreign suppliers while our businesses suffer. Who better to monitor the store than the end user. Face it folks, the telcos have failed the USA.
As for competition, there are plenty of US companies making the equipment. But when one breaks for cheaper labor and the customer for that equipment accepts that source over home-made, the house of cards falls.
house bubble one way to keep the sheep happy when we have unfunded wars. I for one believe the Americans will take this country back it won’t be by putting new people in DC but by one state at a time. You can only support worthless people so long then you just got to cut them off. That goes for Wallstreet,DC and the bankers they will die dirt poor just like a kid who won’t grow up. peace
Bob,
Short but right on target with your comment. I hope your predictions come true!
Greg
It’s not as simple as you think,shops will be raided,no money no food $500.00+ for a loaf of bread,world wide starvation.Collaps of the world trade…
Benny,
The banking system is insolvent. I think we are headed for a crash no matter what. Thank you for your comment.
Greg
Kind of like Europe today. We are just a couple years for it happpening.
Question and a comment.
Is it my imagination or does Europe kind of predict what will happen in the US in a couple years. Seems like when they vote in conservatives or Liberals, then a couple years later we do the same. UK just elected a very conservative government and now our congress becomes very conservative.
The other thing is we can blame the government, big business, liberals, conservatives and any other group we want to blame, but do we really have anyone to blame other than ourselves. Would we be in the pickle we are in today had individuals not run up 5 digit credit card bills, 5 digit car loans over 7 years (well longer than a car last)and purchased homes like their parents owned much over their ability to pay for the monthly payments instead of buying the smaller home they could afford and work up the ladder. Would the government have the red ink today had the people worked within a budget and only spent what they earned?
Ron,
I think you are asking all the right questions. Thank you for your comments.
Greg
Love it!!!!! This video captures the personality of Greenwood.
Great post keep posting thank you!!