There's a lot of talk about "credit crunch" and "sub-prime loans" but a lot of people seem to think this is an economic disaster contained in a few overbuilt cities and households that made bad decisions. This is what the "credit crunch" looks like, according to the St Louis Federal Reserve board: This image shows the non-borrowed reserves at U.S. banks. As you can see, by the time this was published in March, "non-borrowed reserves" were at about -50 billion. So what is backing your savings and checkings deposit at the bank? The required reserves are borrowed from the Fed. As of this report, they had borrowed $100 billion to reach their $40 billion reserve requirement. Yup, they were $60 billion upside-down before the new debt. This week, there's even more write-downs scheduled, and the Fed is expected to go to the Treasury (Congress) to get more money to give more loans to the banks. Quite frankly, if one of our trading partners did this rather then let the banks fall to the mercy of the free market, we would call it: [*]Nationalization [*]Currency Manipulation [*]and downright Socialism
By definition, nonborrowed reserves are equal to total reserves minus borrowed reserves. The fractional reserve is way too much for these guys to handle - they need to borrow to meet the reserve requirement, and the Fed is the only one willing to make the loan (with public funds). One month after that chart, the number plummetted even further. This shows another $40 billion that the banks had to borrow to maintain the "required reserve." The "excess" is the amount of money they've borrowed from the Fed that they're allowed to re-loan through fractional reserves. Basically, the U.S. financial system is bankrupt - or at least -400% from the "required reserve." For all practical purposes, the banking system has been nationalized. The banks have no capital with which to earn back the money they owe to the Federal Reserve.
Related goodies... Americans skeptical of Fed http://money.cnn.com/2008/05/07/news/economy/fed_poll/index.htm -- Bernanke's Nightmare Chart http://www.lewrockwell.com/north/north624.html ^^ Must Read ^^ Wonderful article.
"What is really going on? Deception on a massive scale – a fully legal deception that the U.S. government's bank auditors understand and go along with." I think this phase of America's economic history may be regarded as the greatest theft in human history. Then again, the "winners" write the history books. They'll probably focus in on how the federal reserve saved us from a near-certain collapse, while denying any role in precipitating the crisis. I mean, that's what they did in '29, right?
Gary North has a flair for the dramatic, that doesn't inflate to melodrama like so many economists. We're much more cynical today. And the internet is a major thorn in the side of historical falsification. In '29, it was the beginning of a major crisis that lasted pretty much until after the war was over (and capital goods were released back to the entrepreneurial class). We have to keep educating ourselves and others, so that if the time for reform arrives, people with intelligent ideas are in a position, and are capable of being heard.
While the reserves may have fell, I would assume there holding of collateral (bonds, mortgage securities) has increased.
Yeah. But it's the toxic junk that is poisoning the market already. All they have done, is leveraged the profile of the government to lend a sense of propriety to this transaction. If anyone else took on this crap debt at book value right now, no one would want to do business with them. But by decree, the government forces everyone to do business with them. Either through taxation, or through the provision of (sic) common good "services".
Another reason for the credit crunch is that the borrowers are risky or not qualified to pay the money back.
Banks are reluctant to lend even to suitably qualified person as they are holding far too much bad debts. Even when interest rates drop to zero there are willing borrowers but unwilling banks.
I hope you are kidding. A gas holiday - especially for 3 months would only give permission to the oil companies and investors to raise prices. Then there would be tax increases to make up for shortages of money for roads.....
Banks don't even want to lend to other banks, which is why the gap between the Fed rate and Libour is rising.
With a devaluing dollar, excess in credit, and continued decrease of the interest rate... The only way I can see to fix this (and continue with fiat money). Is to increase wages by about 20% nation wide, higher income per year would give individuals more borrowing power, and thus negate doom for a few years and then we end up like japan. Open question to anyone willing to answer: When things go -really- bad do you think the economic market will survive? I have some silver/gold, property that is paid off, stored food, and crops growing.. But I had some money i wanted to invest into specific industries in the market (mines, gold/silver eft, refineries, and a few others). In your opinion, would it be a complete waste of time to do any investing on the market at all?
I was going to invest through E-Trade, do you think they will survive, Or would you recommend buying from a foreign company? There's no money in cocaine, the government has a monopoly.
I heard a segment from this program on the radio yesterday and it was really good - explaining the subprime mortgage mess in detail and in a way that was easy to understand for Joe Sixpack: The Giant Pool of Money - This American Life It will re-air today and tomorrow on your local NPR station.