[FoolYap]

$this->bbcode_second_pass_quote('CrudeAwakening', 'o')k...so who do the totality of US bank deposits belong to, if not Americans?

[CrudeAwakening]

deleted

[CrudeAwakening]

So, is the consensus that Americans have nothing to fear from rumours of impending bank insolvencies because they have nothing invested in banks other than their own debt?

[cube]

$this->bbcode_second_pass_quote('CrudeAwakening', 'S')o, is the consensus that Americans have nothing to fear from rumours of impending bank insolvencies because they have nothing invested in banks other than their own debt?

[CrudeAwakening]

A low savings rate indicates that the American public are not adding to their cash balances, but does it necessarily suggest that their cash balances are so insignificant that they would not queue outside a bank to access them if they are threatened? Perhaps highly indebted people are more likely to show concern for preserving what little cash balances they have?

[patience]

I see the rub coming when, like the Inter net bank in Georgia (?) that locked a while back, people didn't have access to their small amount of funds, and their bills went unpaid for a while. It bolloxed up the whole works for debtors and creditors alike until the FDIC got another bank to take over servicing the accounts.

Sorta like that commercial where everybody is buying burgers with credit cards, until one guy pays with cash, the music stops, and the scene turns to choas. Now, extrapolate that to a few big banks going down, or a lot of smaller ones, the FDIC gets over loaded and takes a long time to sort it out, nobody involved can get to their money, and confusion reigns.

Don't want to be part of that Chinese fire drill, so we are keeping out of the way of that monster. Always paid off the cards at the end of the month anyway, but now keepthe usage to a bare minimum-only for mail order. Cash for the rest. Thought we were in great shape until we decided to quit using credit cards, and were a bit shocked at taking that couple thou a month back onto OUR books!! I shudder to think about the people with huge carryover balances. And the latest stats say that people are starting to default on CC's and car loans at a higher rate, along with mortgage payments. I even heard that some people with resetting Adjustable rate mortgages are trying to stay afloat by paying the mortgage (6%-8%) with CREDIT CARDS (28%+)!!!!

It looks like here is the "run" problem-it's gonna be lack of credit, not lack of money, since people don't seem have money anymore.

[Twilight]

$this->bbcode_second_pass_quote('CrudeAwakening', 'A') low savings rate indicates that the American public are not adding to their cash balances, but does it necessarily suggest that their cash balances are so insignificant that they would not queue outside a bank to access them if they are threatened? Perhaps highly indebted people are more likely to show concern for preserving what little cash balances they have?

[Iaato]

From the blog attached to Twilight's link just above:

$this->bbcode_second_pass_quote('', '"')A new insolvency system would put be put in place for banks, to address the inadequacy of the current corporate bankruptcy regime as it applies to banks that run out of funds. In the case of Northern Rock, the Treasury has not dared put it into administration under insolvency procedures, because the Rock’s depositors would be unable to draw on their funds for weeks and possibly months. Darling wants a new system that would allow retail savings and deposits in a troubled bank to be ring-fenced – such that depositors in that bank could have confidence that they would still be able get hold of their precious cash.
c) In the application of this new bank insolvency system, powers would be given to the Financial Services Authority to break up any seriously troubled bank into a “good bank”, that would hold the retail deposits and the decent assets, and a “bad” bank, that would hold the rest.
d) Once any bank asked for emergency funds from the authorities, its board would no longer be in charge. The directors of the bank would lose their ability to direct the organisation as a condition of receiving help – and the rights of the bank’s shareholders would also be reduced in the process. That would prevent a recurrence of the extraordinary stand-off at the Rock, where the taxpayer is exposed to the tune of £57bn but where the power of the Treasury to direct the bank is highly circumscribed.
All that said, many vital questions remain unanswered by the Chancellor. These include:
1) What would constitute the kind of “emergency” that would put the Chancellor in the hot seat in this way?
2) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?
3) Would shareholders in a troubled bank lose all rights when that bank is given emergency support?
But what Alistair Darling really needs to explain is why the FSA deserves to receive more powers. Arguably if it had exercised its existing responsibilities in a more rigorous way, Northern Rock would never have been allowed to lend so much money underpinned by so little capital – and we as taxpayers would not now be propping it up to the tune of £2000 for each and every one of us."

[Twilight]

Indeed, read Robert Preston's blog. The comments are interesting too, many good contributions.

In this case, attention has rightly been drawn to this point:

$this->bbcode_second_pass_quote('BBC's Robert Preston', '2')) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?

[patience]

Thanks, Iaato and Twilight. I've been lurking for ever, mostly in the Planning areas.

I've read a lot on prudentbear, Minyanville, and Tickerforum, trying to prepare for this oncoming train wreck, seeking to learn. The best I can see at the moment, one needs to be as disconnected from the financial system as possible, and have enough cash to sustain yourself until it sorts itself out.

Inflation/deflation debates are raging, one says we are in stagflation in the US as a transition to deflation, coming from contraction of credit, probably worldwide. Taking a correct position with regard to this is critical, obviously. As the debate goes on, I decided to make the following moves.

1. Get out of all mutual funds, be they stocks, bonds, or money markets, to be clear of a collapse in the markets, and/or individual institutions.
2. Go to 90% cash until we see which way it all goes.
3. Keep only enough in banks to pay monthly bills, by check.
4. Stop using credit cards where possible, and pay them on receipt.
5. Stock the pantry, plant a huge garden and keep the freezer full of meat.
6. Pay off all debts.
7. Invest in more solar equipment, stored firewood, forge coal, and some barrels of gas.
8. Pull out all pension funds, tax cost, notwithstanding, assuming that 80% of it is better than nothing.
9. Limit my extension of credit in my business to what I could afford to lose.
10. If there is money in excess, to invest, buy US Savings bonds, after we see if there is to be great inflation, or not. If so, buy materials to use in our own business.

Currently, as above, I expect a credit collpase ofhistoric proportions. EXCEPT for govt interventions to the contrary, that is supposed to lead to deflation, where cash is king. Time will tell.

Be careful out there....

[Iaato]

Patience, you've got it going on. I'm not quite as far along as you in these preparations. I'm always way too early in anticipation, so I'm trying to slow myself down a bit and try to wait for events to unfold a bit before I react.

One comment, though. Didn't the government just limit the purchase of Savings Bonds for the consumer? In anticipation of just your kind of thinking?

[patience]

Yupp, sure did Iaato. I think it was a $20k limit, now down to $5k limit/person/yr. BTW, this ain't MY thinking! I just read Tickerforum.org and tried to pay attention. Take a look at the site, and check out the TICKER, (essay) for Jan. 1, wherein he tells how we got in this mess and where he thinks it's going. Then tour the rest. These folks are high strung daytraders, mostly bears, who are up to the second on what's happening. They can be rude, often crude, and socially unacceptable, but they are the best collection of financial brains I've ever seen.

Search for posts by NOTHING (Zen-like) and Genesis (Karl, the site owner). Check out the monetary theory area. As they say, "do your OWN due diligence"!

It took me since last July, just lurking and reading that site and others to decide that I am not a goldbug, and arrive at the thesis I outlined here.. Your mileage may vary....

[cube]

I'd like to make an important distinction.
Is there a possibility that a bank might run out of cash temporarily and you have to wait next day or next week for the armored car to replenish the bank with extra "paper money"? Yes that is definitely possible. However by definition that is NOT a bank run. That's a minor inconvenience.

A bank run (think Argentina crisis) --> now that's a bank run. It's when you can NOT get your money out under any circumstances. I've said it before and I'll say it again. There will never be a bank run in the USA.

I've already given 2 reasons why this is so and now I've come up with a 3rd reason. If Joe Sixpack wants to pull his money out, all he has to do is go shopping with his credit card then pay his monthly bills straight from his savings account electronically. There is no limit to how much cash can be moved around "electronically", so there is no need to physically deliver paper money.

brief summary:
1) Americans have no savings
2) most assets are non-liquid
3) cash can be moved electronically

[Twilight]

A bank run is when crowds of depositors show up at a bank's doors, real or virtual, seeking to move their money out of perceived danger. It doesn't matter in what form the money flows out, or whether everyone is able to withdraw that to which they are entitled, it is still a run. Northern Rock had £10.5bn withdrawn, and billions of that was moved electronically.

What you say about the American situation is true, but the electronic movement of funds to other institutions will still qualify as a run. It is still conceivable that a prominent US bank running into acute financial difficulties could become the subject of such movement.

[Iaato]

$this->bbcode_second_pass_quote('cube', 'I')'ve already given 2 reasons why this is so and now I've come up with a 3rd reason. If Joe Sixpack wants to pull his money out, all he has to do is go shopping with his credit card then pay his monthly bills straight from his savings account electronically. There is no limit to how much cash can be moved around "electronically", so there is no need to physically deliver paper money.

brief summary:
1) Americans have no savings
2) most assets are non-liquid
3) cash can be moved electronically

[threadbear]

Cube, I question whether the Chinese are actually saving that much in transparent, trustworthy institutions, or if they are "saving" their money in the stock market, and creating a helluva bubble, as a consequence.

I expect a 1929 style collapse over there, synchronized with a 70's style stagflation, over here.

From Speigel.

In recent months millions of Chinese have gone crazy about stocks, driving up prices to record levels. Now the government is trying to dampen the stock market fever and prevent a crash at the same time -- but what happens if the bubble bursts?

http://www.spiegel.de/international/wor ... 09,00.html

[I_Like_Plants]

Patience - the bank was called Netbank and it was indeed a run on that and a collapse, it was a large bank, and there was a news blackout of the event in the US media.

You could find grumblings about it by Netbank account holders who'd been cleaned out on Craig's List and that was about it - even those posts were probably being removed so you'd only see the most recent ones.

For the reasons you guys state, a 'run' involving cash is not likely, you are correct. A "run" in terms of credit/debt cards not working any more could happen at any time.

[cube]

$this->bbcode_second_pass_quote('Iaato', '.')..
In fact there have already been multiple reports of weekend shutdowns of bank ATMs and web access in various cities in the past 6 months that have been mentioned on the Housing Collapse thread.

[Twilight]

Countrywide Bank had a run last August.

Bank runs do not have to close a bank to qualify as a run. Depositor nervousness, crowd scenes and/or an abnormal surge in electronic transfers are sufficient.

I agree, the Wells Fargo incident was not a run, it was something else that has been mentioned here, a taste of what could happen if a loss of confidence froze up part of the whole system of electronic transactions, or of what could happen if a bank started bouncing payments through an acute shortage of liquid cash.

I stand by my assertion that depositors in the US could in future flee an institution en masse if a severe and well-publicised event were to shake one. I offer no prediction about whether it would survive, whether depositors would be able to access their cash or whether their cards would continue to work, but they could show up.

[patience]

The Tickerforum personna known as "Nothing", offered that she expected the impending credit mess to resolve into the failure of financeand currencies worldwide in this order:
UK/GBP, EURO, AUS, CAD, and finally, the US$.
The signs that this impending deflation is playing out, she gave as follows:

LIBOR rises, due to banks hoarding cash from each other.
IRX (interest rate index)drops, since banks aren't lending short term commercial credit.
DEFAULTS rise, as people are shut off from further credit.
BORROWING drops, as people are unable to service further debt.
IMPORTS decline, as retail falls.
M2,M3 (money supply) drops, causing banks to be cash short.

Lather, rinse, repeat, into defaltionary spiral.

She indicated that this is a race down the toilet bowl, and the LAST one down wins.

That is the best I can get out of my scribbled notes, but I think it is close to right.

The key point that sold me on this scenario being correct, was coming to understand that Central Bank liquidity injections are not free money, they are LOANS that have to be repaid ina day, week, or month. Thus it has no affect at all on the banks' underlying problem of SOLVENCY. It's a fix for a junkie. As the insane realm of securitized bonds (CDO's) begins to implode, the banks are left without collateral to put up for the CB's loans, and insolvency is imminent. Some are very close at this time. Watch the CB's injections increase. ($500 billion by European CB lately)

Banks cannot borrow their way out of insolvency. As posted here ealier, there are 2 choices, both bad: 1) Govts can literally print money-"monetize" this by buying worthless bonds from the banks.
The result is hyperinflation.
2) Let it happen. Result is depression.

In the 1990's, Japan chose deflaton/depression. Hyperinflation examples abound.

Choose what you think will happen. If you choose the inflation scenario, bear in mind that every govt that did that was brought down quickly. I'm told (don't know) that is because the banking interests shut off that govt's ability to borrow and trade, to stop it, because banks don't want their wealth diluted.

I hope I told this all correctly. Not being any sort of expert here, I can only say that I was sold on the deflation idea.