by MrBill » Fri 21 Dec 2007, 10:04:02
$this->bbcode_second_pass_quote('uNkNowN ElEmEnt', 'C')ould some one please explain what real effects there will be with this? Example, my bank took a $5 billion hit. So bloody what! So they will only post $7 billion in profits this year instead of $12 like last. So?
They won't make as much, the government is probably going to find some way to give them some of our tax money and everyone goes on with business as usual. Where really is the big problem?
The problem is two-fold. One the banks get more choosey about who they lend to. A general credit tightening. Secondly, it is fractional banking in reverse. As the banks struggle to maintain their capital adequacy ratios (CAD) they have less to lend on the margin.
So take an initial $300 billion out of the banking system, and in the absence of fresh capitalisation, the liquidity of banking system contracts by say $3 trillion.
That may be too high, but some investment banks estimate the net loss to be somewhere up to $2 trillion in anycase. During a booming economy that size of loss might be easily absorbed, but in a decelerating economy that slack is not so easy to take-up.
The US at various levels of government - federal, state and municipal - has to compete for that borrowing, and along with the trade deficit and net outflow of capital from the balance of payments (BOP) may need $1 trillion itself to plug its current account deficit.
The Treasury plan to put a moratorium on foreclosures, and draw-out the repayment period for ARMs to five or more years, just adds more uncertainty to the banks' lending decisions. That and, of course, it caps their future profitability as they are stuck providing low-cost loans even as their cost of refinancing increases.
What's worse for the economy than a $300 billion banking loss? A $300 billion loss with no new business coming in through the frontdoor! ; - )
And assets that cannot be refinanced have to be sold into a soft market with a dearth of buyers, so it puts downward pressure on all asset prices. This may be good in the long-run, but the losses are asymmetrical. i.e. They may not be made by those who can afford them, but perhaps by those that can least afford them.
Do not forget that so far these losses have been primarily contained in the banking system. That may be because they are the ones most able to take those losses because as you pointed out they made profits and have an earning cushion. But all those credit products that were bundled-up in asset backed securities were then sold outside the banking system. The risks banks did not want on their balance sheets. Okay where are those assets now? Who is holding them? What are they really worth? And when will those secondary losses become public? 2008!
The organized state is a wonderful invention whereby everyone can live at someone else's expense.