Since 1980 money has become less valuable, costing less to borrow and earning a smaller return. Yet lenders having ever more money on deposit to lend, had to reach out to ever more risky borrowers to find someone who was willing to borrow.
First off, what were the average interest rates received by depositors/investors between 1980 and 2008?
newyorkfed.org
We had rampant inflation in the early 1980s and Volcker raised the Fed Funds rate to 14% in 1980 in a "tight money" policy.
Sure there's a crap load of indebtedness right now. There existed a ton of liquidity over the past 10-20 years. But where did a good portion of that money come from? Possibly from exporting nations, depositing their profits in US instruments in order to maintain their favorable currency ratio to the US dollar (manufacturer financing)?
The Japanese made a TON of money selling stuff to US consumers as did the Arabs selling oil, but we really couldn't complain because they were financing our deficit spending. And now it's the Chinese. And both countries continue to hold our debt, despite the perspective you hold that the USD has become less valuable. It used to be 30 year T-Bills, but when the Treasury stopped issuing them for a number of years, they moved into 30 year Mortgage debt. And they've kept right on doing, despite their B&Ming about US deficit spending.
They must be doing it for some selfish reason, right? Possibly because they are reaching for every straw that will keep their own people employed making stuff they can sell to Americans?
Because no new debt is entering the system asset prices have stopped rising and begin to decline. As they decline marginal borrowers default, further pushing down asset prices and causing more borrowers to default.
No sh*t Sherlock.. And if you, as you seem to opine, believe that fractional lending should be abolished, the result would be that asset prices would continue to decline in a deflationary spiral. Take the banking system back to a dollar in loans for each dollar of deposits and you're going to create the "mother of all depressions". It would be tantamount to what Churchill did when he returned the UK to the pre-WWI gold standard price, despite the inflation that had occurred during the war.
Let's face it.. when investors, whether Japanese, Arab, or Chinese, are willing to deposit money in the US, the banks are under serious pressure to find borrowers. If they don't, then they wind up paying interest above what they are collecting. Banks are not in the business to be safety deposit boxes. And they can't differentiate between American or Foreign depositors. It's all money that has to be lent out at an interest rates higher than what they are paying the depositors.
Now maybe we should have done something to prevent these tremendous trade deficits by being more forceful in confronting this obvious mercantilism. And maybe our financial regulators should have been more diligent is overseeing the mortgage and securization industries. But hey, those foreigners were willing to invest in the US and bankers were more than happy to lend it out to Americans. After all, it tied these nations to our economy, and therefore, our Foreign Policy. Most of all, it created massive origination fees without the lending institution having to carry the loans on their books. It was insane, but given the reality of all that liquidity and manufacturer financing, it was quite an opportunity to profit using foreign money.
The logic is pretty simple, if cynical. I loan you $1 million dollars and you default, it's your problem. If I loan you $1 Billion, it suddenly become MY PROBLEM. Thus, what happened in the US financial markets over the past two years is not just a problem of the US. It's EVERYONE'S problem and if the US falls, we're going to take a lot of economies with us.
If you fight this process of deleveraging as Japan has done, the bad debt hangs on for decades and your economy remains in a coma supported by government spending.
First off, define "bad debt" with regard to Japan. Provide some examples.
Because, as I understand it, Japan is more guilty of continuing to lend money to non-profitable firms in order to prop them up. So if this means permitting these unprofitable firms to roll over their previous debt with new issuance, then yes.. it's bad debt. But it's also an issue of restructuring those firms in order to make them profitable. This normally means layoffs and reduction of payrolls. But, of course, this has political consequences at the voting booth.
US banks are writing off debt on a massive scale, even performing debt that's been handicapped by Mark to Market accounting requirements. But it's apparent that it's going to require a few more years to wring out all the excesses.
And furthermore, if nations like the Chinese and Japanese are in a situation where they need to continue to hold US debt, why are you in such a rush to write it all down at once?
Finally, where do you draw the line in writing off debt? If debt payments are still coming in every month, why should it be written off at all?? Why should a bank be required to write down debt based upon the value of the securitized asset those mortgage bonds are wrapped up in, if those mortgage loans are still in good standing?
Write down what's in default.. Don't force banks to Mark to Market debt that is still in good standing and not delinquent.
And one last thing.. never forget that, for all the problems that exist with the US financial system, Europe, Japan, and China are in far greater difficulties.
Japan because of it's tremendous national debt to GDP and declining demographic taxpayer base. Europe because of it's hidden excesses regarding it's own real estate bubble and over--leveraged banks, and China because of the lack of political accountability in the face of growing internal economic pressures from unemployment.
Hawk |
