$ 24 Trillion Financial Exposure
PIM of SPAIN | July 22, 2009 at 07:09 amby
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Twenty-four trillion is real money. The equivalent of two full years’ worth of GDP, twice the entire output of the United States!
How did this happen?
Of course the Feds and the Bankers are to blame, the people that were left in charge after the bailouts were paid, to collect bailout money for their reckless performance via huge bonuses.
The business model of a bank is amazingly simple. So simple even a banker can understand it. Borrow from depositors at one rate. And lend to borrowers at a higher rate. What could go wrong?
Bankers are greedy consequently mess it all up and as a result it goes wrong.
Messing it up is pretty simple too. Deposits are a cost. Loans are a revenue stream. The more you lend, the more you make. Naturally, bankers have a tendency to lend too much. As the quantity increases, quality decreases. The credit-worthiest borrowers get their money first. By the end of the economic cycle, borrowers are marginal, such as the people who got subprime loans in 2004-2007, often people without jobs, without assets, and with no fixed addresses.
Statistically bankers lend too much in a predictable rhythm, at precisely the wrong time in the economical cycle. They work with numbers and try to improve those over and again. But when it comes to lending, they are greedy to believe that the expansion part of the economic cycle will last forever. Booms raise asset prices. People borrow to expand and take advantage of the expansion-like conditions. Bankers lend for the same reason to those people, to take advantage of customers' willingness to borrow. So, they inevitably lend the most at the height of an expansion that is, just before it turns into a bust.
This shows why busts are so important. They are like an intelligence test for bankers. The dumb and the greedy are eliminated. That is to say… unless the government steps in to save them, let them keeping their job, and collecting their bonuses.
The big question is how can all that debt be reduced? Will Americans actually pay it down? Or will inflation come to their aid?
And what will happen to the trillions of dollars' worth of debt the feds are adding? “The latest report from Congress estimates deficits as far as the eye can see, even to the year 2020, when they are supposed to be still 7% of GDP - or about $1 trillion.” What will happen when this bubble in public debt blows up?
Bernanke this week, warned of continued high unemployment and economic insecurity even as the economy begins a slow recovery. "Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending," Bernanke said. "The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook."
In simple words: there is no end in sight. Wait for the next leg down of the double W → WW.
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