Banking Crisis - April 18th

As this article by Michael Hudson (formerWall Street economist and current professor) makes clear, in the US
more than $1 trillion in official money has been applied to the

A Trillion Dollar Rescue for Wall Street Gamblers

The bailout started on Sunday, March 16. The government and JPMorgan Chase had reason to be embarrassed about the negotiations, for the details trickled out on the Federal Reserve or Treasury websites and Mr. Paulson's speeches went far beyond just Chase and Bear Stearns. It turned out that on the same Sunday on which he had negotiated the $30 billion Fed bailout, Mr. Paulson started a frenetic ten days orchestrating actions by the Treasury, Federal Reserve, and other government agencies to earmark a trillion dollars to re-inflate financial markets for mortgage holders and their associated creditors and speculators.

The American public may justifiably be puzzled by how the government can seem to come up trillions of dollars for foreign wars and banker bailouts, but so little for them. The United States is spending an estimated $3 trillion for an illegal war that has made us less safe, and $1 trillion so far to rescue bankers in a way that is destabilizing the economy.

And the European Union has been no slouch as they have applied roughly the same amount. It is true that these efforts have been made in the form of loans and cheaper credit, but it is still a very large amount of liquidity and overt stimulus.

And on both sides of the pond, the central banks are exchanging good money for highly questionable (read: unmarketable) debts:

Big questions on collateral for Fed loans

The Federal Reserve has the "lend freely" thing down pat. As for the rate on the loan and the quality of the collateral, that's a different matter.

Last week we learned that banks were taking advantage of the Fed's largesse—extending credit to non-banks via its Primary Dealer Credit Facility, or discount window by any other name—by bundling high-yield corporate loans into securities that would qualify as collateral at the facility.

The Fed isn't alone in broadening the range of collateral it is willing to accept in response to the credit crisis. In December the Bank of England added asset-backed securities to its eligibility list. The European Central Bank, which has extended the term of its loans in recent months, has always accepted a range of marketable and non-marketable assets as collateral.

The European press is abuzz with stories about Spanish banks tendering boatloads of asset-backed securities as collateral for ECB loans.

As property bubbles implode in some of the smaller Eurozone countries, credit availability has dried up, sending commercial banks to the ECB even though "there is no formal lender of last resort in the European Monetary Union," said Bernard Connolly, chief strategist at Banque AIG in London. "The need to rescue banks in particular countries would create political problems for EMU: Which country's taxpayers are going to bail out another country's lenders?"

So the Fed is in good company in the race to the bottom on collateral quality.

What happens when you apply that much money? Why, inflation and falling currencies, of course.

So what, then, is the official response of the bankers to the predictable, but alarming, consequences of their actions?

Why, that would be a simple matter of browbeating an uncooperative market, rather than admitting their policies are at fault.

Authorities lose patience with collapsing dollar

Jean-Claude Juncker, the EU's 'Mr Euro', has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.

Momentum traders have blithely ignored last week's accord by the G7 powers, which described "sharp fluctuations in major currencies" as a threat to economic and financial stability. The euro has surged to fresh records this week, touching $1.5982 against the dollar and £0.8098 against sterling yesterday.

"I don't have the impression that financial markets and other actors have correctly and entirely understood the message of the G7 meeting," he said.

And there are some out there, notably bankers who got us into this mess and never saw it coming, who are saying that all is well and that the worst is behind us.

Whew! That was easy!

Bank Chiefs See End for Woes Investors Can't Forget

April 16 (Bloomberg) -- Jamie Dimon, Richard Fuld, Lloyd Blankfein, and John Mack say that the credit-market contraction is winding down. Investors whose bank stocks plummeted aren't convinced.

Dimon, chief executive officer of JPMorgan Chase & Co., said today that the credit crisis is ``maybe 75 percent to 80 percent'' over. Fuld, CEO of Lehman Brothers Holdings Inc., told shareholders yesterday that the ``the worst is behind us.''

Their comments followed similar remarks last week by Goldman Sachs Group Inc.'s CEO Blankfein who told investors ``we're closer to the end than the beginning,'' and Mack, Morgan Stanley's chief, who said the crisis will probably last ``a couple of quarters'' longer.

This is a companion discussion topic for the original entry at