Do we really need these insolvent banks? Will our economy collapse without them? What would happen if we had to move on without them? These are the questions I'd like to examine.
Today's disconnection between main street and wall street is as stark as ever. Just a mere few quarters after the biggest financial crisis we have seen since the depression, banks were making record quarterly earnings and collected fat bonuses.
How can the banks get back on their feet so quickly while the rest of the economy continues to suffer? The answer is easy. This is what banks have done.
Mark to Market valuations suspsended - A suspension of mark to market valuations has lead to creative accounting as banks can now value their loan portfolios and securities investments at any made up number they want. If banks were writing down their assets prior to the suspension of mark to market rules, then they can easily write them back up to the par value or to a value they determine it to be worth based on their calculations and methodology. A rubber stamp from the external auditors to assess their assumptions are reasonable and bam instant profits out of the thin air. Homes that should be in foreclosure are suddenly performing assets.
Borrowing from the Fed - The Fed discount window is permanently open to the Fed banks as they borrow FRN at a rate of .25%. This money feeds the trading desk. With the advent of high frequency trading (HFT) platforms, banks can borrow endless money from the Fed at .25% and gamble with that money out on the open market. The vast majority of volume on the NYSE is due to HFT. HFT platforms make hundreds of thousands of trades, both buys and sells, in literally nanoseconds. They are capable of making a profitable spread on hundreds of thousands of trades every nanosecond. We've heard about banks who didnt have a single trading day loss in any quarter. I would speculate that there are banks out there that haven't had a single nanosecond trading loss in any quarter. HFT is akin to skimming off the top. These platforms funnel legitimate money out of the market and into the banks earnings which are then converted into fat bonuses for the fat cats on wall street. This is how public money turns private because we are talking about profits. If the banks were losing money then the backstop to bail them out again would be the public.
Conventional Banking no longer part of the business model - Banks no longer make money based on conventional banking practices such as lending. Taking in deposits and lending based on the deposits no longer happens. The model is broken due to the cost structure banks currently have. Bankers make too much money. There is simply no way for banks to earn the profits they are used to if they don't gamble and speculate on investments and securities. Convential banking spreads are not enough.
Also, very astutely, they recognize that the public is broke. Why make loans to people who can't pay you back? They know full well the state of the consumer. Most people are buried in debt and unlike the government they can't borrow endlessly (at some point the same will be true of the government). So potential small business ventures have no chance of ever lifting off the ground because banks refuse to lend.
So why do we need these banks? Their profits have no direct link to production. Their profits are merely accounting entries. Banks are supposed to facilliate business but have become a larger sector than sectors that actually make things. The government is continually spending good money chasing bad money when its bailing out these banks. There are very productive companies such as Apple that bring value to the marketplace. If we allow these banks to fail and others the opportunity to fill the gap then lending would be available to small businesses who will actually produce something of value to society. We are cutting off our innovation base by not allowing them to have access to money that will be put to good use. All of us can't earn profits due to accounting trickery and then extract real money out of the business.
If these changes occur, the economy wouldn't collapse, it would merely adapt and change for the better. Those invested in the current structure should not be bailed out or kept afloat so that they can rig the next market. It is time for a global reset on all the fake debt owed to these banks, assets need to be priced to reality, sound money should be introduced to restore faith and confidence to the markets, and lets move on. This is the only way we will have growth. Because right now the only thing growing exponentially is our debt (which is by design and worthy of its own blog entry entirely).
Today's disconnection between main street and wall street is as stark as ever. Just a mere few quarters after the biggest financial crisis we have seen since the depression, banks were making record quarterly earnings and collected fat bonuses.
How can the banks get back on their feet so quickly while the rest of the economy continues to suffer? The answer is easy. This is what banks have done.
Mark to Market valuations suspsended - A suspension of mark to market valuations has lead to creative accounting as banks can now value their loan portfolios and securities investments at any made up number they want. If banks were writing down their assets prior to the suspension of mark to market rules, then they can easily write them back up to the par value or to a value they determine it to be worth based on their calculations and methodology. A rubber stamp from the external auditors to assess their assumptions are reasonable and bam instant profits out of the thin air. Homes that should be in foreclosure are suddenly performing assets.
Borrowing from the Fed - The Fed discount window is permanently open to the Fed banks as they borrow FRN at a rate of .25%. This money feeds the trading desk. With the advent of high frequency trading (HFT) platforms, banks can borrow endless money from the Fed at .25% and gamble with that money out on the open market. The vast majority of volume on the NYSE is due to HFT. HFT platforms make hundreds of thousands of trades, both buys and sells, in literally nanoseconds. They are capable of making a profitable spread on hundreds of thousands of trades every nanosecond. We've heard about banks who didnt have a single trading day loss in any quarter. I would speculate that there are banks out there that haven't had a single nanosecond trading loss in any quarter. HFT is akin to skimming off the top. These platforms funnel legitimate money out of the market and into the banks earnings which are then converted into fat bonuses for the fat cats on wall street. This is how public money turns private because we are talking about profits. If the banks were losing money then the backstop to bail them out again would be the public.
Conventional Banking no longer part of the business model - Banks no longer make money based on conventional banking practices such as lending. Taking in deposits and lending based on the deposits no longer happens. The model is broken due to the cost structure banks currently have. Bankers make too much money. There is simply no way for banks to earn the profits they are used to if they don't gamble and speculate on investments and securities. Convential banking spreads are not enough.
Also, very astutely, they recognize that the public is broke. Why make loans to people who can't pay you back? They know full well the state of the consumer. Most people are buried in debt and unlike the government they can't borrow endlessly (at some point the same will be true of the government). So potential small business ventures have no chance of ever lifting off the ground because banks refuse to lend.
So why do we need these banks? Their profits have no direct link to production. Their profits are merely accounting entries. Banks are supposed to facilliate business but have become a larger sector than sectors that actually make things. The government is continually spending good money chasing bad money when its bailing out these banks. There are very productive companies such as Apple that bring value to the marketplace. If we allow these banks to fail and others the opportunity to fill the gap then lending would be available to small businesses who will actually produce something of value to society. We are cutting off our innovation base by not allowing them to have access to money that will be put to good use. All of us can't earn profits due to accounting trickery and then extract real money out of the business.
If these changes occur, the economy wouldn't collapse, it would merely adapt and change for the better. Those invested in the current structure should not be bailed out or kept afloat so that they can rig the next market. It is time for a global reset on all the fake debt owed to these banks, assets need to be priced to reality, sound money should be introduced to restore faith and confidence to the markets, and lets move on. This is the only way we will have growth. Because right now the only thing growing exponentially is our debt (which is by design and worthy of its own blog entry entirely).
No comments:
Post a Comment