Economists increasingly worry that banks are suffering such massive losses that they will be forced to cut back their lending to consumers and businesses. That would slow the economy, much as the savings and loan crisis did in the early 1990s. Yesterday, an analyst predicted that Citigroup, the world's biggest financial services company, would suffer another $15 billion in losses in the coming six months from its exposure to exotic types of debt.
Each bank has a unique capital structure, so grand, over-arching predictions are difficult to make. But we've seen a ton of writedowns this quarter. If memory serves, we've seen $50 billion or so. That's more than chump-change; that's serious. And considering the the overall reset schedule out there, it's bound to get worse before it gets better.
At some point, these writedowns will start to impact lending ability. That was the gist of Goldman Sach's recent prediction.
The direct losses from mortgage foreclosures will be about $400 billion, economists at Goldman Sachs estimated in a report last week. If that were the extent of the losses, the financial system could easily absorb them. But because of the way banks and other institutions work, the losses could spread far more widely.
Banks are required to keep capital on hand so they can weather losses. The mortgage-related losses are cutting into their capital and thus could cause a commensurate drop in how much they can loan. Taking into account that "multiplier" effect, the mortgage problems could reduce by $2 trillion the credit available to consumers and businesses, Goldman estimated in the report.
I don't know where that line is or if we've already crossed it. But if we haven't crossed it, we're getting a whole lot closer than we would like to admit.
2 comments:
I've been looking at this for some time now and have concluded that there might be a run on the banks, or Citibank at least. If even just Citibank gets stuck, it could spread like wildfire; anyone who had an S&L account when that mess went down would probably want to get out, fast.
I have some money that I'd like to keep liquid for paying bills etc., and would like to bank in Euros, but the contagion has already spread there. It seems that the British and Spanish real estate markets and financial institutions have done the same as ours, and that their banks are not only exposed to their own bad decisions, but are also invested in our SIVs and CDOs--the same ones that are causing the writedowns at Citibank and elsewhere. Not only that, but there's been a run on a British bank (Northern Rock, I think it was), and other British banks are capitalizing themselves with lines of credit drawn on continental banks so they don't have to disclose the fact, as they would if they had taken money from the British central bank. One regional bank in Germany, the Sachsenbank, went under and was taken over, on the basis of U.S. investments it had made.
I've read that the Canadian and Australian banking systems are the most secure in the world, but Canada seems to me too close to the furnace, and that although its dollar has unmoored itself with the US dollar, it seems to me that its proximity to, and trade relationship with, the US makes it far too susceptible to disaster if and when the shit hits the fan here. Australia is too damn far away to start an account (I'm on the east coast).
So why not a Swiss bank account? UBS and Credit Suisse come to mind, but it seems that they're broiling in the same pot as Citibank et al. In discussions with a Swiss Cantonal bank, I've come to find that Credit Suisse is really one of the cornerstones of the Swiss banking industry, and if they go under, the same will happen with many of the state-regulated cantonal banks.
A poster at the Big Picture suggested I buy pure, unadulterated gold and bury it in the backyard! That's not looking so bad right now, I have to confess. I wish I knew what to do.
Hey Anonymous, one thing you should consider is that banks in other countries don't just let you rock up and open an account. There are taxation and citizenship considerations to take into account (pun intended.)
Other counries' banks want to make sure you're not moving dirty money, and they want to be able to collect taxes on it (which they can't do easily if you're not a citizen).
I'm an American who emigrated to Australia, in part because I saw this economic implosion coming. (Also to escape the moral stain of paying taxes for war.) My wife and I have accounts at Credit Suisse, but they don't deal with you unless you have a substantial amount of money. Less than half a million, they're not particularly interested.
And Aussie banks! One of the reasons they're secure is because they've got sticks up their arses. I had to prove that I had a tax file number and legal permission to stay in the country before they'd even look at the piles of cash I wanted to give them (including my paycheck gained from working in the same hospital where the bank branch was located).
Even today, after two years in the country, they won't give me a credit card, despite a gold-plated U.S. credit record (means nothing in another nation), a balance of over $10,000 and proof of scads of euros and Swiss francs. No worries, mate, I pay cash for most things and use my U.S. cards for online transactions.
In short, unless you're mobile and well-heeled, dreams of foreign banks accounts are probably out of reach.
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