Banks & Signs of Depression
Banks problems are one of the leading signs of depression. We spoke Monday about the problems that banks are having and how this can be dreadful for the economy. Today, we’ll continue our look at signs of depression within the current economy.
Studies have shown that when the FDIC closes down a bank and liquidates it’s assets, the true market value of assets are 30% less than the stated book value of the bank’s assets. (Again, this is because of the rule change that allows banks to not have to mark assets to market.) Consider that if bank assets are all 30% overvalued because of the false valuation on their balance sheets, there is tremendous more pain to come in the banking industry as this discrepancy is slowly exposed bank by bank.
This is a large reason that banks are not lending today and one of the biggest signs of depression. They know that the assets on their books are not worth nearly what they are reporting. So they take the practically free money the government is giving away and lend it back to the government in Treasuries and make a nice risk free profit to try to make up for the fact that their other assets are performing so badly. This has a number of consequences….
- The US Government gets money lent to them which is vital as they borrow unprecedented amounts of money. Even though they first created this money through the Fed, the money is washed because it was given to the banks who voluntarily lent it back to them. So it does not count officially as “Quantitative Easing”, although it is essentially the same thing (except that not only are we printing the Dollars to buy our own debt, but we are allowing the banks to collect a profit on the move of Dollars from our left pocket to our right.
- It also creates another potentially dangerous disruption down the road because big shifts in interest rates caused by market participants might cause this large block of lenders to disappear overnight. This could lead to an immediate and unexpected shortage of lenders at the Treasury Bond Auctions. This could lead to a massive printing of money for the Federal Reserve to buy the Treasuries debt with money out of thin air which is just the sort of thing that spooks worldwide holders of Dollars.
- This also means that banks do not have to get out there in the economy and find the up and coming entrepreneurs to lend money to. They don’t have to be quality bankers, discerning risk and reward and lending money so that the economy starts moving forward. Instead, they have a huge incentive to take the easy way out and lend risk free to the US government. The money spenders in Washington might like it, but it’s bad for the rest of the economy.
So banks are failing at an extremely high rate. The banks which aren’t are hiding massive problems on their books and just trying to make it through. This will mean not only pain for the banking industry but for the economy as a whole because money is not circulating into the hands of businesses which normally lead the way out of an economy. If you’re looking for signs of depression, look no further than this. M3 (which is a very broad measure of money supply) is contracting at levels not seen since right before the Great Depression!
Next, we’ll look at the effects this will have on the real estate market as well as the problems the real estate market is already facing without any additional help needed.
Photo credit: TaranRampersad