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The Achilles heel of the US economy has been the overly aggressive banking practices of the past 20+ years, especially among the dozen largest US banks, the so called "money center banks," which have made heavily, ill considered loans to Third world countries as well as speculative loans in domestic real estate, oil and gas ventures and faultering US companies. Because of these non performing loans and the high interest rates the banks must pay to attract large CD's, their accumulated operating losses have resulted in negative equity positions and made them vulnerable to sudden withdrawals of their large deposits. Only the FDIC, which has permitted these banks to list non-performing loans as "good" has prevented them from being declared insolvent.
Why should such unusual action be taken in view of the many smaller banks that have been allowed to fail recently? The FDIC and Fed feared a "domino effect" failure of other money center banks (too big to fail), which could have precipitated a worldwide financial crisis. Although the regulatory agencies recognize the great vulnerability of the major banks, they cannot afford to let one fail. The FDIC has less than 1% in funds to back the depositors in US banks so the Fed, with it's printing press potential, will take up the slack.
For two reasons this policy will be inflationary: the Third world countries can now afford to default on their loans, knowing the large banks will be recompenses at taxpayer expense, and these same banks can now become more aggressive and venturesome in their lending practices, knowing they will be bailed out if they get in financial trouble. As a result, the large banks now feel free to acquire smaller, better run banking operations that do not have these guarantees.
The Achilles heel of the US economy has been the overly aggressive banking practices of the past 20+ years, especially among the dozen largest US banks, the so called "money center banks," which have made heavily, ill considered loans to Third world countries as well as speculative loans in domestic real estate, oil and gas ventures and faultering US companies. Because of these non performing loans and the high interest rates the banks must pay to attract large CD's, their accumulated operating losses have resulted in negative equity positions and made them vulnerable to sudden withdrawals of their large deposits. Only the FDIC, which has permitted these banks to list non-performing loans as "good" has prevented them from being declared insolvent.
Why should such unusual action be taken in view of the many smaller banks that have been allowed to fail recently? The FDIC and Fed feared a "domino effect" failure of other money center banks (too big to fail), which could have precipitated a worldwide financial crisis. Although the regulatory agencies recognize the great vulnerability of the major banks, they cannot afford to let one fail. The FDIC has less than 1% in funds to back the depositors in US banks so the Fed, with it's printing press potential, will take up the slack.
For two reasons this policy will be inflationary: the Third world countries can now afford to default on their loans, knowing the large banks will be recompenses at taxpayer expense, and these same banks can now become more aggressive and venturesome in their lending practices, knowing they will be bailed out if they get in financial trouble. As a result, the large banks now feel free to acquire smaller, better run banking operations that do not have these guarantees.
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