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It's time to face up to both the
systemic and economic reality that is plaguing banks, housing and
international trade. As matters stand at present, they can neither co-exist
nor thrive in their current state. They are like Siamese triplets who cannot
work out their joint living arrangements. They must either reconcile or die.
The
first step is to acknowledge that banks are really mortgage investment
companies.
They do not hold any serious amounts of cash beyond a small percentage to
meet daily demands. Moreover, the banking system relies on all funds that are
withdrawn eventually making their way back in to the bank from other
depositors.
So
the expression," cash is king", holds true only if you can actually
access your cash and someone else is willing to accept it as payment. In the
case of a bank run, you would therefore want to be at the front of the queue
rather than at the back.
The
second step is to acknowledge that banks presently are holding too many
mortgages that are underwater or have become the owners of properties where
the owners have walked out and returned their keys. This situation has not only
killed profits but has also eaten deeply into the capital of the banks. In
fact if it was not for a combination of not putting foreclosed properties on
the market and delaying the recognition of losses, the banking system would
be seen for what it is and would have blown up. Those wretched little
termites in government, accounting firms and other high places are holding
hands to stop the structure from crumbling.
The
third step is to recognise that money in the banking system is being severely
destroyed and devalued by rates of interest that are more insult than
payment.
And all this is being done to keep rates at a level that do not cause
homeowners and commercial property owners to keel over and cause a cataclysm.
The
fourth step is to recognise that much of the cheap money found its way into
the system due to the incredible trade surpluses that China and other nations
made available to their customer nations.
My
suggestion therefore, is as follows:
- Calculate
the true level of write-offs that should be taken on foreclosed
mortgages.
- Charge
each depositor holding more than $2000 (or some other amount) a pro-rata
amount that will equal these losses.
- Issue
Type B bank shares to all depositors whose accounts have been culled
with the same face value as the amount taken from their accounts.
- As
banks begin to earn profits these shares can be redeemed and cash will
flow back to the depositors ahead of existing shareholders.
- The
whole process could be augmented by the central banks of all nations
uniformly revaluing their gold holdings by a substantial amount and
taking up Type B shares in these banks in exchange for gold whilst still
holding possession of the gold separately in a central repository.
Whilst
I cringe at the thought of taking money from people's accounts, I also feel
that the circuitous route of pumping money into the FDIC and in turn loading
that debt onto the nation's debt is nothing more than a slow and deceptive
bleed that is not providing a quicker and more sustainable resolution.
This
solution should of course be applied even to the GSE's which in turn would
mean the Chinese and other holders of such securities taking a haircut/shave.
Many
will see this as a retrograde step and one which will paint the USA as
another Argentina, but can anyone tell me for how long and in how many ways
the current rotten facade can be maintained?
There
is no doubt that housing became a fixation of people everywhere and in
particular the Western World where cheap interest rates and non-existent
standards created an illusion that everything is possible and that homes
could become the source of untold riches. Well they did, but only for some.
In Australia unfortunately, the illusion still persists.
The
fourth step is for the USA to wean itself off the fixation on housing and
return to saving and investing. Tax deductibility on mortgages for investment
homes should possibly be stopped to the extent that interest exceeds income.
This should separate the real investors from the speculators and tax
minimisers.
Above
all the USA must recognise that the system must return to real jobs in
manufacturing, reduced waste in resource consumption, upgrading of
productivity enhancing infrastructure and an education system geared towards
engineering and science rather than law and finance. These are the things
that form the basis of longer term prosperity rather than the illusions and
delusions being peddled at present.
Without
real jobs all the accounting, spending and political solutions (as well as my
own humble idea) count for nil and this should be apparent from the results
to date.
The
people in the USA may well end up consuming less if they were to manufacture
and grow, most of their own output, but the reality is that on the current
trajectory they will end up consuming precious little if they cling to the
lure of cheap overseas products. In other words the current status is not
sustainable and if the politicians in Washington have delusions or are
spreading delusions that this is possible, then the end is a foregone
conclusion.
This
world's resources are finite but man's and government's proclivity to be
wasteful and destructive reached new heights in recent years with the
opportunity of cheap interest rates. If free trade is to succeed is cannot
not be on the basis of gargantuan trade surpluses or horrifying deficits.
A
growing GDP is not necessarily a sign of real growth if that GDP is
increasingly composed of military expenditure, building houses that remain
empty, building malls that cannot be filled and feeding and housing the
biggest prison population in the world both by number and percentage. The
list could go on both at a national as well as a personal level but I think
you get my drift. All nations to some extent suffer from these problems.
Moreover,
any short term advantage China may have gained will also count for nothing,
if it continues to rely on unsustainable levels of US consumption. The
greater the imbalances, the greater the final reckoning that awaits us.
That's
right folks, we have had too much of everything.....too much consumption, too
much debt, too much war, too many losses. Everything in excess is damaging.
Despite this the real things such as gold and silver have quietly risen above
the frenzy precisely because of that reason......they cannot be produced out
of thin air like derivatives nor can their supply be ramped up with the flick
of a printing press switch. Moreover, they do not have the problems of
storage or 'use by dates' that other essential commodities like wheat and
foodstuffs have.
I
am sure that there are some problems with what I am proposing and I imagine
that other writers have made proposals along similar lines, but I have yet to
see or hear of any real solutions from the countless thousands of people who
work for the Federal Reserve, the IMF, BIS and all the other governments and
central banks of the world. They produce loads of statistics, loads of debt,
mythical borrowing facilities and little else. They massage expectations
but cannot perform real surgery. They have erected expensive props and
scaffolding but have done little to repair the structure.
What
I am not sure of is what hidden angels of death lurk in the system that
cannot be flushed out without tearing the system apart. Perhaps it is those
derivatives or perhaps the losses are so frightening that our political
masters prefer Greek style accounting to maintain the peace.
Yes,
there are solutions but personal and national self-interests only have short
term profit horizons and very little long term gain. And this is where the
problem lies. The world cannot change unless we change ourselves. Personal
values underpin financial and economic values and not the other way round. In
the meantime we continue to exceed the devil's expectations even though we
have Lloyd Blankfein on our side doing God's work. Thank you Lloyd.
Perhaps
Warren Buffet and Bill Gates could kick off the process following their
recent pledges to give away half their personal wealth. By the way,
"which half?" Who knows? Anything is possible.
In
the meantime any investment portfolio without precious metals fails to
understand both history and reality.
Do
you understand or are you caught in the headlights of the approaching train?
Peter Souleles
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