Worldwide Banking Plague: Where Will It Stop?

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While public health officials were warning we are "only three mutations away" from a strain of the flu that would surely create a deadly pandemic, another more heinous plague is encircling the earth - a banking plague that the bankers themselves have started by over-lending money.

In Argentina it's business as usual in this South American country, the third largest economy in Latin America, where another bank run is underway.  Argentina confiscated bank accounts over a decade ago and wary depositors are withdrawing their money in droves to protect against a similar fate.  In mid-May Argentinian banks lost $518 million in deposits.  Jittery savers have pulled an estimated $3.5 billion of their money out of the financial system. 

A Wall Street Journal reports says Argentine depositors have probably stashed their savings in safe deposit boxes, under mattresses or put them into hard assets like automobiles and real estate.  They fear a devaluation of the Argentine peso like what occurred in 2002 when dollar deposits were forcefully converted to pesos during a deep economic crisis. 

British bread and circus

While The Bank of England is pumping more money into the economy, it appears all it is doing is making sure there is enough money to pay for all the increased taxes.  For example, three quarters of a million British workers, among them nurses and teachers, will be thrust into the higher 40-per cent tax bracket.

While The Bank of England is pumping £140 billion into a collapsing economy, a business reporter asks "Is there any demand for this cheap money?"   The Brits may have a greater shortage of entrepreneurs than capital.

And suspiciously, two British banks claim a computer glitch left millions of its customers in a lurch just as Britain faces a credit crisis.  Up to 12 million customers were unable to pay bills or move money.  Is the bank covering for a liquidity shortage? 

Then -- shame, shame -- a British bank kept receiving deposits for a failed Christmas savings company (Farepak) even though it knew it was headed for insolvency.  A court has ruled, while there is no law against this, the bank had better reconsider and make a contribution to the compensation fund.

Whereas cuts in government entitlements have not officially begun in the U.S., in Britain pensioners are expected to see their benefits cut, such as free bus passes, free prescription drugs and winter fuel allowances. 

To make matters worse, real estate values in Britain are predicted to fall by 11%, predicts a prestigious British bank. 

Like Japan and Italy, Britain is demographically doomed to a future of a growing population of retirees and fewer young people to shoulder their health and pension costs.  Britain and Japan also face the problem of having few natural resources (aside from Britain's offshore oil rigs in the North Sea). 

But then again, Canada, a country with many natural resources (water, oil, hydropower, agriculture), and its banks that are in a more solid position than most of the other banks in the world, says it can't maintain its debt-fuelled economy forever.  Consumer spending is keeping the Canadian economy going, but it is debt-driven consumption.  The damn bankers have hooked the world to live a lifestyle it hasn't earned. 

The big bank downgrade

Why did Moody's Investors Service down-rate 15 global banks, including Bank of America, JP Morgan Chase and Goldman Sachs, just as the European debt debacle is reaching another crisis point? 

It's because these American banks generate a lot of profits from European operations that are tied in with the debt repayment problems of European economies.  Notice that Wells Fargo bank wasn't on the list of downgraded banks because nearly all of its revenue is domestic. Foreign loans comprise just 5% of its portfolio. 

The Euro-zone groan

Italian Prime Minister Mario Monti says "we have a week to save the Eurozone."  Some skeptics might think Mr. Monti is blowing smoke in an attempt to provoke Germany to fork over money or the Euro will die a quick death.  But if Italy is attempting to extort money from Germany to keep the Euro currency intact with a false crisis, why would Moody's push the downgrade credit risk button on banks on both sides of the Atlantic, and Great Britain, which sticks to using the British Pound and elected not to join the European Union?

Just when Europe needs capital, it is fleeing the continent.  According to one report entitled "The Great European Bank Run," maybe 100 billion Euros have exited Spain.  Up to 10% of Italy's capital has left for parts unknown.  Greece is seeing a hemorrhage of over 4 billion Euros a week (as much as 700 million Euros in a single day!).  There are a reported 200,000 contracts in the futures market that short the Euro.  Everybody is banking on a collapse of the Euro now.  Vultures are swarming.

Greeks, Italians, and Spaniards are massively attempting to exchange Euros into something, anything.  Switzerland, geographically in the middle of this mess, is said to be experiencing "tsunami-like inflows" of Euros says John Maxfield who writes for The Motley Fool, who also cites a chief investment officer at a London-based investment firm to say: "If there is global mayhem, the U.S. dollar will be the only credible survivor."

US banks

The U.S. Federal Reserve bank, the nation's central bank that distributes money to commercial and consumer banks, announced it will pump $267 billion of new money into the economy to ensure banks have sufficient cash to perform daily functions.   This could be an ominous sign that the Federal Reserve is trying to get ahead of a brewing crisis.

U.S. banks face a different type of banking problem.  They need to make long-term loans.  But with economic volatility, they are reluctant to do so.  As some of their loans come due, U.S. banks are hesitant to replace them even though they are awash in deposits.

Super-low interest rates are the biggest reason for this phenomenon.  Even the banks can't produce profits that get ahead of inflation.  And another way for banks to meet reserve requirements is to shrink their loan portfolio. 

Short-term debts require more short-term funding.  A goal has been set for big banks to have 30% of their assets in long-term unsecured debt plus shareholders equity.  Currently none of the biggest U.S. banks would hit that goal.

Italy may have found a way out

Italy is finding religion quickly.  It realizes it must turn assets into cash rapidly to pay down debts so it is busy selling off billions of Euros of state-owned assets.  Some of these assets will be sold to the government-owned postal savings bank, which will keep these assets in state hands but off the government's balance sheet.  Italy has about €50 billion of state-owned companies and €425 billion of publicly owned real-estate earmarked for possible sale.  If only the U.S. would sell off some its many assets.  For example, hundreds of U.S. federal buildings are empty and many are prime real estate. 

Italy also has another card it can play.  Italian central banks hold gold (2451.8 tons worth about 141 billion Euros) equivalent to 10% of the bailout it needs. 

Banking in the world is very volatile

One advisor suggests "individuals around the world should have cash, precious metals, and food in their home in the event of a national emergency. Bank accounts could be frozen, businesses could thus have trouble sustaining operations, and all sorts of madness could then ensue," he says. 

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