Bad Banks

I try not to think about the economy, but it’s hard not too. And then when I do think about it, I am not sure what’s going on.

I found a site that’s devoted in part to explaining the basics of the crisis to your basic layman like myself and listened to a 58 minute podcast on the banking crisis.

It explained the bank balance sheet: how the bank’s capital and deposits are supposed to balance with the money it has loan. From this perspective the banking crisis is really simple. The balance sheets are completely out of whack; the money made in loans completely outbalances deposits and capital. The people on the podcast said the biggest banks, to put it simply, are already busted. They are insolvent. One of the results of this is that when the government gives these people money, they don’t loan it out because they need the capital to help balance their balance sheets.

The banks are held together at this point by bluster and hot air. The bankers claim they are not insolvent. They claim that all the mortgages, for example, that they are holding are worth or will be worth, in some distant future, far more than they are actually worth at this very moment. So they are not insolvent, at least in some distant future which may or may not occur.

This explains one of the problems in trying to solve the crisis. The government might buy up those toxic assets, but the banks want top dollar (the dollar in some distant future) and not what they are really worth at the moment. This would really be sticking it to the tax payer. The tax payers would be buying mortgages grossly inflated because the banks won’t sell them for what they are really worth.

One banker out of Europe I think put it simply: give us the money now because one way or the other the tax payers are going to pick up the bill and you might as well do it now by having tax payers (the government) give as much money as possible to us bankers.

All of this is pretty infuriating because the bankers’ practices (all that irresponsible lending) are what got us in this mess in the first place.

That’s true enough. But the "climax" of the podcast came when one commentator said, "We (the people) are the problem." Since 1980 Americans have been encouraged to buy, buy, buy. And we have done so on credit, credit, credit, with the result that we have gone deeper into debt, debt, debt. The banks are holding all that bad money because we, the people, now lacking credit, can’t pay off the our debts and don’t have the money to buy much of anything. So the problem isn’t just the banks but a whole way of life that Americans have embraced since around 1980.

This fits my pet thesis: the problem is the Consumer Society and the ethic it promotes.

The podcast closed with a scary statistic. For some decades now the economy has trucked along with the amount of consumer debt being about 30%, 40% or 50% of the GDP (the total value of all final goods and services produced in a particular economy; the dollar value of all goods and services produced within a country’s borders in a given year). But this year consumer debt was 100% of GDP. The GDP was 13 trillion and the amount of debt Americans carried was 13 trillion.

The last time this happened was 1929.

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