Les Jones

“Some days I really wish I could go back to being completely clueless about the economy”

Wednesday, September 30th, 2009 | Best Of, Economics |

From a financial board I read. “Some days I really wish I could go back to being completely clueless about the economy. Now I know enough to be scared but not enough to actually know what to do.”

I know the feeling.

In speaking to some local bloggers this past year a couple of people said things like, “I can barely read your site anymore. The economic stuff you talk about is too depressing.”

It is depressing. Worse, I’ve been holding back on how bad I think some parts of the economy are going to get.

For instance, I basically think the U.S. banking system is gone. Insolvent. Bankrupt. As in their liabilities greatly exceed their assets if their assets were fairly priced. It only takes a small writedown in assets to destroy a highly-leveraged bank in a fractional reserve system. Even by conservative estimates most banks are wiped out.

In the last few decades the banks made mountains of loans that will never, ever be paid back in full. Every foreclosed property you see is a loan gone bad. As Karl Denninger says, for decades credit expanded much faster than GDP. Do that long enough and you’ll never have any hope of paying back all the money.

The only reason the banking system hasn’t shut off the lights is that the government bailed it out. After they bailed it out they changed the rules so that the banks could mark their assets to fantasy and not be shut down.

The next step was to effectively replace the banks’ lending function. The U.S. government is now the de facto banker in the United States. The banks are just the places with the brick buildings, free toasters, and lollipops for the kids. Any money they lend ultimately comes from the Federal Reserve’s purchase of Treasury notes, Fannie Mae and Freddie Mac debt, and mortgage-backed securities.

If that sounds like paranoid rambling, see yesterday’s post, Federal Reserve has bought 100%+ of 2009 mortgage market. I’d love to be convinced I’m wrong, but I don’t think I am.

Tags: bailouts, banks, mortgage mess, the fed

3 Comments to “Some days I really wish I could go back to being completely clueless about the economy”

Alcibiades
September 30, 2009

And how would this be different under a non-fractional reserve banking system?

Les Jones
September 30, 2009

In a non-fractional system the deposits never leave the bank and therefore aren’t at risk. It’s academic since all modern banking is fractional.

The big issue in banking is the ratio of deposits to reserves and the amount of risk the bank takes on.

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