The Road to Bank Nationalization

This week, seven major corporations announced major layoffs, adding 72,000 to the unemployed. At the same time, lending by the big banks fell. With falling demand for loans, it is little wonder that President Obama described the national economic situation as “worsening day by day.” Clearly, we are heading into a deepening and severe recession that is spreading worldwide.

As the reckless speculation of the major money center banks became clear in the second half of 2008, there was resistance to rescue efforts. However, the perceived wisdom was that these banks were too large to fail. Congress approved the $700 billion TARP to rescue them and the financial system. Now, there is growing demand by politicians for the banks to lend, in the face of falling loan demand. Clearly, a Democrat Congress is intent upon using Wall Street to dispense taxpayer funds to Main Street. This is socialism and strikes at the very heart of the ‘American Way’ of free enterprise.

Three major questions arise. Firstly, can the banking system be used to dispense cash to un-creditworthy citizens? Secondly, should the free-market banking system be used for political purposes? Thirdly, can the American government afford to bailout the collapsing economy and banking system simultaneously?

Acknowledging Tim Geithner’s vow to employ “credit action on a dramatic scale”, there is little doubt that the new Treasury Secretary thinks the banking system not only can, but will, be used to push taxpayer funds into the Main Street economy. If so, would this not necessitate nationalization?

The original TARP was designed to ‘rescue’ the banking system by relieving it of depreciating toxic assets. Subsequently, the TARP was used to inject capital into the main money center banks. So far, despite its enormous size, the TARP appears to have failed.

Contrary to political hopes, the banks are seen too have used the TARP selfishly (but rationally) to bolster their own capital and pay their own executives, whilst making fewer loans.

There is now an increasing specter of a massive bank failure, despite the TARP. As a result, there is growing pressure to nationalize the banks, as is being done in Europe. So far, Americans have resisted this option, but with Bank of America now trading below $5.00 per share, the temptation is growing.

In a recession, falling loan demand and deteriorating credit worthiness result in fewer loans worth making. There is mounting pressure, especially from Democrats, for banks to make ‘social’ or imprudent loans. Such actions are practicable only if the banks are nationalized.

Most Americans are firm believers in freedom and its economic progeny, the free enterprise system. But, under the cover of entitlement programs, increasingly large numbers of Americans are dependent, directly or indirectly, upon the Government.

In short, socialism is already alive in America, but is being extended, via the banking system, to become the dominant political force.

Citi and Bank of America, two of the three most important money market banks are technically insolvent. Yet, each has received $45 billion in TARP funds.

These two banks have total exposure of some $78 trillion to derivatives. Most importantly, they have almost $6 trillion of exposure to highly toxic Credit Default Swaps. Even JP Morgan has more than $9 trillion of exposure to these assets.

The Government TARP and stimulus packages now add up to some $3 trillion. Already, they have caused political consternation and pose serious challenges to America’s credit rating and ability to extend further its towering debts, without crowding out viable corporate borrowing. What will happen when all of the private bank liabilities get thrown on top?

The money center banks render the TARP and, indeed, the total financing ability of the U.S. Government almost insignificant. In short, they have become too big to bail out.

It appears that America and the world are staring into the face of financial collapse, depression and eventual hyperinflation. Little wonder that, despite the growing evidence of recession, gold is rising in price.

5 Responses to "The Road to Bank Nationalization"

  1. Alex   February 5, 2009 at 8:46 am

    What are your suggestions, John? You got any ideas – or positive feedback – to report on, or are you going to throw some more coal in and call it a runaway train?

    • Bill C   February 5, 2009 at 8:56 pm

      Alex – love the coal comment – LOL …. perhaps he is survivalist and owns property in Montana, has several guns, plenty of ammo,food/seed and some gold but doesn’t want too many people to know about it..Nice article but me thinks Dr. Doom’s disciple might be a little too apocalyptic. That said, I concur that the debt fueled growth of the last few decades is going to take some time and pain to unwind. Difficult economic times – yes, and they will likely last for several years and could spawn civil unrest and perhaps conflict in areas that may be hit hard AND for an extended period of time. A strong middle class is essential for a stable society.With regard to the banks, I suspect the US admin will avoid nationalization at all cost. Monetization may be in order and will likely lead to inflation pressures several years out … hyper? I don’t think so.

  2. Anonymous   February 5, 2009 at 9:29 am

    These are all very pertinent points, so let me give you a common man’s perspective.I can assure you from the street that no one who is being foreclosed or who needs loan restructuring is getting it. Despite the political grandstanding inside the beltway the banks are behaving worse that they ever have as far as the recently unemployed and now financially broken common man is concerned,Nationalization may come not by TARP failure or the massive and irreparable (internally inflicted) financial damage, but as you say, as the only sensible political action to calm the swelling army of furious pitchforks. I believe that this collapse will change for a generation what most American’s believe. The free market, globalization and the addiction to growth rather than responsible sustenance that has allowed the corporations of this country to behave like feudal kingships with no regard for their employees, and will now be seen as the robber barons of times past.The way the Fed taxes us for printing our own money, the ponzi scheme of Social Security, the collapse of the value of the entire nations pension planning, the incredible corruption of the lobbying by the banks, Fannie, Freddi and an army of other interested deregulators will be seen as part of an ugly Madoff scheme to fleece the American people. This collapse will bring about a sea change in American’s belief in the free market system. People will be forced to abandon freedom as the financial system’s collapse takes away the one thing that gives them their freedom, money. The will run scared and frightened into open warm embrace of national socialism.So how will this nationalization affect the Rothchilds, Rockerfellers, Warburgs, Morgans, Windsors et all who own the NY Fed, the Fed, all the politicians, the police and the army? WIll they suddenly loose everything too?No, this is the greatest ‘land grab’ the world has ever seen. By breaking the system they will come to own it outright, and be its dictators in the socialist New World Order they have been working towards for decades. For generations they have maintained their power and increased their profits through the economy and forced national unity of war, and we will see them play this card again in the next few years. It also handily achieves the Bilderberger’s desire for global depopulation too.Gold does seem the only safe haven, but I know not of a single supermarket, gas station or vendor set up to accept coin or bullion in payment, so I’m not certain its value is the hoped for bridge in the case of the coming collapse that its buyers are hoping.God help us all.

  3. interested reader   February 5, 2009 at 1:33 pm

    banks are told to continue to lend in order to limit the overshooting to the downside after an overshooting to the upside. Funny how the same banks that now worry about bad loans had no problems throwing good money at risky and undocumented subprime borrowers that the banks knew perfectly well could not perform in the long run. Subprime borrowers did not steal the money, it was given to them by whom certainly knew better. Similarly, Fannie and Freddie are primarily in the prime business; subprime is Wall Street’s invention. Stop defending the indefensible.

  4. Laobaixing   February 13, 2009 at 10:24 am

    Great piece. Too big to bail out..