Friday, March 17, 2023

Is the current banking crisis the tip of the iceberg?


Charles Hugh Smith suggests that it is, because the underlying economic assumptions behind the banks' problems have not been resolved.  Emphasis (bold/italic print) in original.

Without much in the way of recognition or inquiry, we've allowed finance to become the foundation of the entire economy. The entire economy will now grind to a halt without trillions of dollars of credit sluicing through every rivulet, stream and river of commerce. From overnight lending facilities to 30-year mortgages, debt/credit is the lubricant of the economy.

What's been forgotten is the economy that once relied not just on credit but on savings and cash. In the pre-financialization economy, capital and credit were scarce; capital commanded a premium, and lending / credit sluiced through very narrow channels: conservatively underwritten conventional 30-year mortgages, debit cards such as American Express that had to be paid in full every month (and such cards were hard to get, by the way), and conservatively underwritten loans to enterprises.

. . .

What we take for granted--auto loans and credit card limits equal to or higher than an annual wage--would have been viewed as incomprehensibly imprudent and fantastical. Loans for vehicles were available, but only to the credit-worthy and if the buyer put down 50% in cash.

. . .

The astounding expansion of credit and financialized skims and scams are now the lifeblood of the economy, and any pause in their endless expansion triggers shivers of terror. Good golly, what kind of horrors would we suffer if J. Citizen can't buy a $50,000 car or truck with $1,000 down? How could we survive without 3% down payment mortgages? What doom would await us if corporations were no longer able to raise billions of dollars in the credit markets and use that money to buy back their own shares?

Rather than be viewed correctly as a necessary evil that must be strictly constrained lest it eat the heart of the real economy, debt/credit is now seen as our most precious bodily fluid, without which we perish. In this peculiar psychosis of hyper-financialization, the reality that ultra-loose credit and capital that carries no premium inevitably jacks up prices and costs to the moon, fatally distorting the real economy, is not even visible.

What is visible is the "necessity" of putting a lavishly over-priced Disney World vacation on a credit card and the "necessity" of a $60,000 new pickup truck. Or what the heck, a new $110,000 Wagoneer. We all deserve everything credit enables, from buying meme stocks on margin to designer jeans.

. . .

This profligacy and dependence on ever-expanding credit just to sustain "normal life" is scale-invariant, meaning every city, county, state and federal agency also needs ever-expanding credit just to stave off collapse, and every zombie company / entity also needs ever-expanding credit just to avoid the slippery slope to bankruptcy and liquidation.

There's more at the link.

Capitalist Eric considers where those underlying realities may take banks, and the rest of us.  His is a very pessimistic position, possibly (I hope probably) too much so.  Nevertheless, it's a grim portrayal of the worst possible outcome that may confront us.  As such, it's worth taking into account what he predicts.

Events are moving so rapidly, now, with the failure of three banks in the past week, and the desperation moves by the Federal Reserve to keep the house of cards from collapsing, are now obvious. Cracks have been seen in the dam for quite a while; now the spider-webbing is accelerating, water is starting to escape.

. . .

I don’t believe it will be a slow grind, happening over years…  but over a period of weeks to a few months, before the crash-and-burn is over, and we’re left fighting to survive.   While the conditions and overall events will be largely the same as what has happened throughout history with all fiat currencies, the speed at which things are occurring are much faster; another byproduct of technology, information-sharing and alternatives to government-controlled MSM.

Understand, though, the Federal Reserve probably won’t be direct trigger of the economic collapse.  They have established the conditions, so that it will happen, and cannot be avoided.  Michael Yon made a great point, using forests as an example: if you want a forest fire, you just let undergrowth be uncleared, fail to manage it, and then have a nice hot summer, and the conditions become such that a forest fire WILL start, whether due to careless campers lighting a campfire or a lightening strike from a summer storm.  Once the conditions are set, it WILL happen, regardless of what the actual spark is.

I summarized in “Crash Positions,” the results I expect to see as the financial collapse gets into high gear. Instead of me rehashing it, I would ask that you please read it in its entirety.

The conditions are ripe for dollar collapse, due to a loss of confidence in the USA ... One economist I was watching stated the dollar will be done when people no longer have faith in it.  They may come as a results of bank-runs and financial collapse, it may come via war, as China and Russia go kinetic against the USA and all the other countries stuck in the Western financial Ponzi scheme, or it may be something which we haven’t even considered.

The full impacts of this economic collapse will be brutal, especially so on the Western countries who’ve lived under the thrall of the fiat-banking systems for the past 200 years.

Again, more at the link.

As I said earlier, Capitalist Eric's predictions are a worst-case scenario.  However, the underlying reality behind our present situation, as portrayed by Charles Hugh Smith above, remains accurate.  It may not end as badly as Capitalist Eric foresees, but it will end badly.  I don't see how it can do otherwise.  There are too many bad apples in the barrel, and they're contaminating the fewer and fewer good apples that remain.  

Oh - and in case you think that both Charles Hugh Smith and Capitalist Eric are doom-and-gloom-mongering, exaggerating the risk and amplifying the worst-case scenario, here's what Moody's had to say earlier this week.

In a harsh blow to an already-reeling sector, Moody’s Investors Service cut its view on the entire banking system to negative from stable.

The firm, part of the big three rating services, said Monday it was making the move in light of key bank failures that prompted regulators to step in Sunday with a dramatic rescue plan for depositors and other institutions impacted by the crisis.

“We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY,” Moody’s said in a report.

More at the link.

Please note Moody's emphasis on "the rapid deterioration in the [banking] operating environment".  Read it in the light of Capitalist Eric's perspective that "I don’t believe it will be a slow grind, happening over years…  but over a period of weeks to a few months".  I think things will move more quickly in the near future.  I'll be (pleasantly) surprised if they don't.

Also, please note that Moody's reclassification applies to the entire US banking sector.  I don't think one of the top ratings services in the world can be accused of fear-mongering or exaggeration when it comes to assessing current risks.  That's the business they're in, and they wouldn't be in that business if they consistently made the wrong calls.

You might also ask yourself why most of the mainstream media aren't putting two and two together and getting four as the answer (at least in their public comments).  Anyone with common sense can read the reports I've cited above (and others), put them together, and come up with the same picture I'm seeing (as Moody's clearly did).  That applies particularly to financial analysts and journalists.  If they're not seeing it, or refusing to talk about what they're seeing . . . I suspect ulterior motives.



Ray - SoCal said...

Tom Luongo’s take makes more sense to me.

The Fed has only one tool, increase interest rates.

The Biden Administration seems to have been deliberately pushing inflation. Zero interest rate money has created a lot of bubbles and pushed extreme financialization. Russia and China are pushing bed-dollarization. Having international trades done not using the dollar. The Russian Sanctions are accelerating this trend.


Eaton Rapids Joe said...

Mainstream media and the DC Beltway are fully invested in the idea that you can consume your way to wealth. Most of their wealth is tied up in huge houses in swanky, Chardonnay swilling subdivisions with no organic reason to exist.

Anonymous said...

I had a CD that went pooff last week- nice safe CD...10K... gone. FDIC insured? Maybe- I will believe it when I see it.
We are not wealthy, just grunt laborers, but have worked our asses off to live within our means and try to save for the future. I simply do not know what to do with money that is in the banking system. Right now I am tending toward a big greenhouse, perimeter fencing, anything tangible that will have a return.

Anonymous said...

Read some of the articles about Credit Suisse bank for a look at what a loss of confidence / belief by the public looks like.
I think that this may be the beginning of a cascade failure in the banking system, and possibly as a result, in the monetary system itself.
John in Indy

Peteforester said...

Oh, the MSM sees what's happening. It's in the Left's pocket, and the Left tis in charge right now. You won't hear a peep from China News Network or Rachael Madcow about this. It would be interesting though, to be fly on the wall seeing what all these talking heads are doing with their money right now... I hope they're not putting their money where their mouths are... You just don't even want to think of where those mouths have been...

Unknown said...

Part of the problem is the mandated retirement/pension accounts that have to be invested _somewhere_ (and the government restrictions around where it can be invested) so there is a lot of money chasing a relatively small pool of allowed investments.

David Lang

James said...

The worst case scenario will happen because something is different this time. Everything is being run by idiots who don't know they are idiots. They are without a clue as to what to do and will fall back on their belief in their utterly wrong world view. In the past, even when everything was going to hell there were always at least a few competent people involved. All the competent people have been replaced with supporters of the party line. Just wait and see what they do when the panic set in.

Carteach said...

Taken from a middle-class single family level, all these banking issues are fascinating, impactful, and utterly outside our control. We are very slow turtles crossing the superhighway of life. Everything we can do is defensive alone, and even if we get that perfect we can still be squashed.

The most productive thing we can do is study history and learn from how our ancestors dealt with such events. Every hour we spend thinking about what's wrong today should be matched by an hour studying how people survived the great depression, civil wars, and invasions.

Michael said...

Carteach your ON TARGET. With but a small caveat. If you don't listen to what your enemies are bragging about, you're a headlight blinded turtle crossing that street. A smart turtle tries to off the highway and into the swamps where the high-speed world doesn't go and where his gardens grow.

At one time real wealth was a healthy family, well fed, sheltered and trained to do productive work. A family garden wasn't a burden but a reason to brag a little.

It will be that way again, pretty soon. But that path is going to be harsh and dangerous for quite some time.

Chaos time is near. A new TV isn't worth a literal hill of beans. I can eat some beans and plant some beans for MOAR bean. Try that with a frozen pizza.

Peter, I hope you don't mind but a link to an excellent sitrep of St Paddys day.

Pray for wisdom, protect your family.

Stay away from crowds I MISS Ole Remus.

Anonymous said...

Biden deliberately pushing inflation?
What, just for inflation's sake?

No, just plain ol' buying votes and campaign contributors. Same old "divide and conquer".

Remember Sens Schumer AND McConell gloating over the "bi-partisian" budget agreement a few months ago?
I do.

Francis Turner said...

Capitalist Eric is likely wrong about Europe, Germany, Ukraine and PRC, Taiwan in his diatribe. I can't say whether the rest is accurate but those points seem to be massively off base and that leads me to skepticism regarding the rest. IN particular if China were to stop exporting they would be just as screwed as everyone else because the major engine of actual revenue in their economy (as opposed to government printed funny money building railways to nowhere) is the export of finished goods. If they stop that yes they make the rest of the world unhappy, but they also make the Chinese worker extremely unhappy. From the way the wuflu lockdowns crumbled they don't want to risk that again in the near future

Now I do expect Credit Suisse to go in the fairly near future and be rescued by the swiss government somehow. That may well lead to other exciting ructions but I think we're some long distance away from global financial meltdown.