Ann Pettifor

Is the banking system broke, as well as broken?

Much of the news of the last few weeks –

… can be explained by the  need for banks to urgently raise money to fix their balance sheets. Unfortunately their activities are akin to the little Dutch boy with his finger in the dyke. Just as they raise funds from e.g. commodity speculation to shore up balance sheets, those funds may be drained from some other part of the bank by e.g. a rise  in mortgage defaults or company bankruptcies as economic activity stalls, house prices fall,  foreclosures are held up by legal arguments, and the over-borrowed fail to repay.
This explains why the banking system may be broke, as well as broken.
It is a system almost beyond repair – despite a massive injection of public funds; government guarantees – and the largesse of central bank loans made available to bankers at negative rates of interest.

As I wrote in a blog for the Huffington Post in October last year – banking  has been turned on its head, and the system, bizarrely, has become a borrowing, not a lending machine. No-one, not politicians, not regulators, not central bankers, least of all bankers themselves – appears prepared, or has the political will and the guts –  to fix it.

After the 1970s, the banking system began burying economies in debt. Large amounts became unpayable in 2007, and the system imploded. Those banks that survived, were bailed out and propped up by taxpayers, but were nevertheless severely impaired.  The damage will not be fixed until unpayable debts are finally written off/cleared out/’re-structured’/acknowledged; until unpayable mortgages are written off.

Above all, the damage will not be fixed until governments implement policies that stimulate economic activity, so that companies can hire workers, and generate income for both themselves and their employees. This in turn,will generate income for banks.

Whatever happens policy-makers will have to face the reality that the banking system is going to face huge losses.  This implies  more bank bankruptcies – if that is not a tautology. And bankruptcies imply further  nationalisation of the private banking system.
Because of the failure to face the reality of unpayable debts; because policy-makers seem unable to implement policies that would create jobs, and with it the income to repay debts, and help the housing market recover –  because of these failures, the banking system continues to bleed.
And this helps explain why recovery – around the world – is halting. Why it can’t take off. Why there is still, in the words of Bill Bonner at the Daily Reckoning.…” a Great Correction.  Much remains to be corrected.”
Bonner has an interesting tale, quoted from Bloomberg, which explains a great deal:

May 6 (Bloomberg) – Melissa White and her husband stopped paying their mortgage in May 2008 after it reset to $3,200 a month, more than double the original rate. That gave them extra cash to pay off debts and spend on staples until their Las Vegas home sold two years later for less than they owed.

“We didn’t pay it for about 24 months,” said White, who quit her job as a beautician during that period after becoming pregnant with her first child and experiencing medical complications. “What we had, we could put towards food and the truck payments and insurance and health things I was dealing with.”

Millions of Americans have more money to spend since they fell delinquent on their mortgages amid the worst housing collapse since the Great Depression. They are staying in their homes for free about a year and a half on average, buying time to restructure their finances and providing an unexpected support for consumer spending, which makes up about 70 percent of the economy.

So-called “squatter’s rent,” or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief US economist at JPMorgan Chase & Co. in New York.

That’s $50 billion lost to the banking system.


1 thought on “Is the banking system broke, as well as broken?”

  1. Over at Beat the Press they were writing about Geithner was going to China to talk to them about opening markets up to the US Financial industry. I’m not really clear what good will do this. The Financial Industry feels like our fake economy. It’s this big casino we keep counting on to keep ours the richest nation, but it only works insofar as it greases the wheels of a real economy.

    It feels shortsighted of Geithner to go to China to expand financial markets. That’s an influx of cash, sure, for the big banks. All that does is buy time for a system that’s all but doomed. If, instead, Geithner had made creating markets for the real economy his priority, we might actually start to see wages rise and folks able to pay some of their debts.

    Some. We’re over debted, so a lot of those credit card and predatory loans debts are doomed any way you slice it. At least, that’s how it feels to this lay-person.

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