bank run blog

While economists and politicians fret over whether China and Russia will ever lead a movement to replace the US dollar as the world’s reserve currency, American citizens have already done so as they grapple with the effects of the Depression that was bought for them with their own 401ks. USA Today is reporting :

“A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency.
Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.”

The concept, never entirely abandoned in small town America, has enjoyed a resurgence over the past year. According to the Daily Telegraph :

“Some of the currencies have been around for years but the recent economic downturn has encouraged others to follow suit. According to some estimates, there are now more than 75 local currency systems across the country.”

USA Today : Communities print their own currency to keep cash flowing

Daily Telegraph : Struggling US towns print their own currency

With trillions of US taxpayer dollars already distributed in an array of federal bailout packages, and an emerging political consensus that more bailouts will be necessary, it seems reasonable to consider the possibility that the nation might have its sovereign credit rating downgraded, or even default on its debt.

But the American response to the worldwide economic crisis that is now in its 16th month has been one of public denial and official obfuscation. Indeed, many analysts have predicted that the narrow and halting nature of the government approach, which seems primarily intended to kick the problem down the road to the next administration, will eventually be seen as a disastrous and costly misjudgment.

In the accompanying video from CNBC, Hong Kong-based investment manager Martin Hennecke raises the prospect of a US downgrade, referring specifically to a warning issued by Standard and Poors in September. The fatuous fulminating that issues from the other guests and the CNBC reporters is, like a portfolio of mortgage-backed assets, priceless :

“The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

‘The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system’ and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

‘In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,’ Hennecke told CNBC.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.”

CNBC : US May Lose Its ‘AAA’ Rating

Reuters : S&P says pressure building on U.S. “AAA” rating

Bloomberg : Bond Investors Turn Bearish in U.S. on Cost of Treasury Rescue

Even accountants are having trouble keeping up with the mutating and expanding federal bailout programs, with new packages being announced almost daily in dizzying denominations.

A useful video summary of the bailing to date, which pegs the total at $3.45 trillion, is posted at Yahoo Finance Tech Ticker, featuring Aaron Task and ClusterStock’s Henry Blodget :



According to Task :

“Tallying up the ‘true’ cost of the bailout is difficult, and won’t be known for months if not years. But considering $3.5 trillion is about 25% of the U.S. economy ($13.8 trillion in 2007) and the U.S. deficit may hit $1 trillion in fiscal 2009, hyperinflation and/or sharply higher interest rates seem likely outcomes down the road.

At the very least, the possibility of the U.S. losing its vaunted Aaa credit rating — which determines the Treasury’s borrowing costs — cannot be discounted.”

But the ante has already been upped, with Fox News reporting today that the total has reached $5 trillion, citing an article in Forbes magazine :

“The latest proposal by Democratic lawmakers to aid ailing automakers includes $25 billion in emergency loans, but that practically amounts to spare change compared to the federal government’s total tab for the continuing credit crisis, Forbes reports.

The magazine, citing the research firm CreditSights, said the federal liability so far is at $5 trillion — and it’s still rising.

The total is the cumulative price tag of the various government bailouts, loans and assistance packages intended to shore up the financial industry and revive the flagging economy. It includes efforts spearheaded by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair.”

Yahoo Finance : Bailout Price Tag: $3.5T So Far, But ‘Real’ Cost May Be Much Higher

Fox News : Report: Federal Credit Crisis Tab at $5 Trillion and Climbing

The markets were up and down until rumors of a mega-bailout began to circulate in the afternoon, sending stocks sharply higher. Jittery traders are clearly placing their faith in federal intervention as the only way to decelerate the securities meltdown. The Associated Press reports :

“Wall Street rallied in a stunning late-session turnaround Thursday, shooting higher and hurtling the Dow Jones industrials up 400 points following a report that the federal government may create an entity that will take over banks’ bad debt

A report that Treasury Secretary Henry Paulson is considering the formation of an entity like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left investors ebullient. Investors hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc.”

Reuters is reporting that details of competing plans are emerging from Washington, with legislative compromise the likely outcome. Paulson is unlikely to get every single thing he wants, as the engineer of the train wreck :

“Paulson has been talking with congressional leaders about possibly setting up a federal agency to deal with the broken mortgage debt instruments that are choking global capital markets, said a congressional aide and a lobbyist.

‘It’s a modernized version of the Resolution Trust Corporation (RTC), which was used after the S&L crisis,’ said the aide, declining to be further identified.

Schumer offered a different idea in a speech urging that future federal capital infusions for banks be conditioned on their making loan modifications and other terms.

The New York Democrat proposed setting up a federal agency that would ‘provide capital to struggling financial institutions in exchange for an equity stake in the banks,’ similar to the Depression-era Reconstruction Finance Corp (RFC).”

Associated Press : Stocks surge on report of entity for bad debt

Reuters : Paulson, Schumer offer U.S. financial bailout plans

The widely predicted and much feared contraction in US consumer spending has been obscured by the government stimulus checks and skyrocketing commodities prices, but the underlying data confirm that consumers are tapped out. The Associated Press reports on consumer spending and personal incomes figures that are pushing Wall Street down this morning :

“Personal incomes plunged in July while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to wane.

The Commerce Department reported Friday that personal incomes fell by 0.7 percent in July, the biggest drop in nearly three years and a far larger decline than the 0.1 percent decrease analysts expected.

Consumer spending edged up a modest 0.2 percent, in line with expectations, but far below June’s 0.6 percent rise. When the impact of rising prices was factored in, spending actually dropped by 0.4 percent in July, the weakest showing for inflation-adjusted spending in more than four years.”

Analysts agree that the outlook for the second and third quarters is bleak, as the factors that pushed GDP growth to a stated 3.3 percent in the second quarter recede. According to Bloomberg :

“Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent.

As domestic demand wanes, the U.S. may also be hit by a slowdown in economies abroad that would erode export gains. Europeans’ confidence fell more than forecast this month as the economy teetered on the brink of a recession, a report showed today. The European Commission’s index of executive and consumer sentiment dropped to 88.8 from 89.5 in July.

The Commerce Department report’s price gauge tied to spending patterns jumped 4.5 percent from July 2007, the biggest 12-month gain since 1991.”

Associated Press : July incomes drop by largest amount in 3 years

Bloomberg : U.S. Economy: Consumer Spending Slows, Inflation Accelerates