Banking & Finance News

By: Brian Gisseler, Eric Janik
Date: July 14, 2011

This page started as a simple link trying to comprehend the basis of our current economic situation in the United States, and exploded into a plethora of information and answers to many questions that arose.

Original Post:

I found this interesting, thought I'd share...

Nice article, but I can put holes into it like Swiss cheese though. I don't think Glass Steagall will do anything. This type of situation happened in the late 80s with the savings and loans crisis, and Glass Steagall was enacted. The situation we are in is Glass Steagall INDEPENDENT. In this email I'll explain how current numbers aren't looking too shabby. If you want an explanation of why Glass Steagall is independent from this crisis, I can explain that in the next email (just ask).

I'm not by any means saying we are out of the red economically speaking, but things are indeed looking better. Here are the holes in this article:

Though troubled banks look bad, it really isn't as bad as you think and we've hit the PEAK in troubled banks NOW (the article confuses the credit crunch peak with this peak).

Troubled banks are completely different than failed banks. Troubled banks are considered to have a percentage number NPLs (non-performing loans) within their loan portfolio. A loan is usually deemed non performing if the debtor does not pay anything after 3 months. Within the FDIC numbers, we have a total of 888 troubled banks since 2007. You may think the number 888 is the number of NEW troubled banks, but it is not. It is the number of current troubled banks in that time period. Now 888 is a lot, but let's really breakdown these numbers statistically to prove to you we've hit a peak.

Rate of Change Year to Year For NPBs (Non performing banks)
Year# NPBs# Change% Change
2010884182 25.93%
2011888 4 0.045%

The numbers don't lie. While we haven't ended the year yet, we only have 4 new banks in the NPB list. We can assume 8 new banks total this year in the NPB category, which gives a %Change of 1%. You might be thinking that we should have seen these numbers when the "Credit Crunch" actually happened in 2007. That is incorrect. These things have a delayed reaction and are very much tied in with unemployment and under employment. If John Doe is out of work for more than X time, he won't be able to pay his mortgage (you can argue if John Doe should have had the loan in the first place, but that's another discussion). The more John Doe's there are as unemployment rises, the more NPLs you WILL have (and possibly consequently the more NPBs). But there is a shining light in here. Again NPBs have stabilized which tells me we are weeding out the people who are unemployed within this crisis. Barring another crisis hitting the fan (hello American National Debt), we won't see an increase in NPBs/NPLs. Looks like the banking system absorbed the unemployed/under employed and people who plainly couldn't afford what they bought.

Looking at these numbers begs the question, if there are more NPBs out there isn't it inevitable to have more bank failures?

Let's look at the numbers for FAILED banks. Banks fail for multiple reasons. You can fail our entire banking system if all of us went to the bank and asked for our money. The banks only require a ratio of 1 dollar in the vault for every 9 dollars they loan. In other words, for every 10 dollars you have in a bank, 9 of that is loaned out. You can see where that becomes a problem. Hence the creation of the Federal Reserve Bank (we can argue the legitimacy of the FED but that's a different argument in itself). These guys are a lender of last resort, and only lend to banks at an interest rate they call the FED discount window (currently between 0 - .25%). So if this happened, your bank would probably borrow money at a discount from the FEDs to avoid failure. A bank run won't necessarily destory a bank, but a combination of that and NPLs may.

If the bank has a higher ratio of NPLs (results in less supply of money), then it has cash demand (consumer demand), and the bank isn't making money off of interest, we have a possible failure. Failures happen when banks are not profitable for extended periods of time. This is where the FDIC swoops in, takes over the bank, and auctions off its assets at a fire sale discount rate to other banks. Plus it insures everyone's bank account up to 200k, so the consumer doesn't get screwed. If you look at the numbers, the number of failed banks has decreased DRAMATICALLY.

Rate of Change Year to Year For Failed Banks
Year# Failures# Change% Change
2007 3
2008 25 22733.33%
2009140 114460.00%
2010157 17 12.14%
2011 26-131-83.44%

2011 has been a turning point. There are 131 less banks that have failed compared to last year. Now back to the question, does more NPBs equal more bank failures? NO

Failures VS Non Performing Banks
Year# Failures# NPBs% Failure
2007 3 76 3.95%
2008 25252 9.92%
2011 26888 2.93%

Our failures are lower than 2007!!


FDIC employees are doing their job and the Federal Reserve printed and lent a TON of money to avoid bank failures (hello Quantatative Easing, QE1, and QE2). The FDIC are scrutinizing the non performing banks to prevent them from loaning the FED lent money and the Feds are offering low interest rate loans to prevent banks from complete failures to their obligaions!

This does create a stalemate. The FDIC won't let the bank loan until their NPL ratios get back to normal. So the only way to reduce the number of NPBs is a healthier more vibrant economy. Now I'm no government cheerleader, but the numbers are saying the FDIC and FED are doing their job and are PREVENTING BANK FAILURES. Another year and we'll be reversing the number of banks added to the NPB list.

So what can we say in conclusion? We have a circular dependency. The banks rely on customers and economic activity to be healthy, economic activity and customers rely on the bank to lend out money. One won't get better without the other. There are two ways to get out of this slump, wait it out, eventually the numbers will completely stabalize (at the rate we saw in the numbers explained above, another 5 years and we are good), or we get unemployment out of the way and get consumers spending now. I opt for the latter option, which is harder, but that is a whole other topic of discussion :0

Wow! Amazingly informative!

I did catch the slowdown in NPB rates when I read the article, and I thought that was a good sign as well, but I also realized that it wasn't the only metric. The point that you made about failing banks vs NPBs I think puts it all in perspective.

This increase in debt where the FED absorbed all the debt from the banks is still not a good situation, but perhaps they can slowly clear it while building the economy.

Do you think we're still at risk of losing our status as the world's reserve/base currency?

That's a good question. I think we are in a new world, where a basket of currencies will be a possible reserve base, it's just diversification. Can you blame anyone who wants to diversify? Many individuals do it in their personal finances to protect their wealth, it spreads risk, so why can't countries do it? I think people are making a big deal out of the whole reserve currency issue. So what if we aren't the base currency? It's not like our economy will go to shit. Currency is just another way to represent wealth. It's like having a intel chip and a PPC chip that are equivalent in speed and power, just a different chip. Now the reason one would want to diversify is to reduce risk of currency devaluation. So I can see why it may freak people out if we aren't a reserve currency, that means our currency is being devalued. But there are ways to combat currency devaluation, one way is diversification, the other is more complex.

When a currency is devaluing, that means inflation. How does inflation show its ugly head? When there is too much supply of a currency and little demand for it (hello supply and demand). So how did we get into the situation we got into now? Lots of people assume it's because the FEDs lent so much money to the banks at the discount window of 0 to .25 percent. banks needed the cash and asked for that loan, FEDs turned on the printing press to provide that money, and we have more supply. But here is where people are missing the schin dig. The banks that asked for these loans needed it to cover their asses from defaulting and becoming a failure. In fact they horded the FED lent money in order to become stable (reference article 1, first article I wrote). So yes there was more currency in the supply chain, but it never got to the consumer and into the economy, it stayed in the bank which in turn never really increased the supply of money (M1, Eventually the bank will pay off that loan to the FEDs.

The way we got to where we got to is not by lending to the banks, it is QE1 and QE2 (quantitative easing), more specifically lending to the GOVT. These programs were enacted by the FEDs (Federal Reserve) to combat deflation, which was showing its ugly head (look at housing prices, they deflated a shit ton). So deflation could be seen as a supply and demand issue too, but in this case it was an indirect supply demand issue which affected the currency (housing prices). How does something indirectly affect a currency? We have a fiat currency, not backed by gold, but backed by ECONOMIC ACTIVITY. That dollar you have is backed by more than gold, it's backed by land, housing, factories, etc. It's a representation of these assets and has the ability to grow as the economy grows and shrink (deflate) as the economy shrinks. With a gold standard, your currency doesn't grow. It's backed by a finite set of an asset, which only grows if you find more gold. It's not as flexible, and can't grow and shrink as easily WITH the economy (whole other argument). Anyhow, the way you fight deflation is provide a massive supply of money to the economy to create inflation. And you do that with Quantitative Easing.

So back to QE1 and QE2 ( These programs are a huge rugs that covers multiple ideas on creating economic activity. One way is printing money, lending money to banks with a low interest rate (to stimulate them to loan, but if you read article 1, you know why banks aren't lending), and the most evil thing, buying Treasury Bonds (yes, buying American debt!!!! also known as monetizing our own debt!). So in order to create an inflationary economy in the conundrum we are in, the only option is to buy US Debt (remember banks aren't lending cause they themselves are in trouble and in risk of defaulting). Wow, funny how our Debt is in the news :) So the FEDs indirectly gave an unlimited money supply to the US govt, which in turn they went on a shopping spree. Obama care (adds 1 trillion to our debt each year!!!! that's insane!), "project ready" stimulus packages, etc... So what's the problem? Well, QE1 and QE2 programs have ended (QE2 just ended in June) [FYI the FED is the biggest holder of US debt, not China], with no more debt being bought by the fed (aka money supply to US govt stopped), how does the US pay for its obligations without additional moneys coming in?

One of two ways, stop the stupid spending and live within our means (which is the favored option), or increase taxes. Problem is, if you increase taxes in these times, you will KILL the economy (less money to spend for companies means less economic activity). Taxes are DIRECTLY related to economic activity. The more activity there is the more tax revenue there will be. Let's take an example. Say you are making $100,000 a year, we'll use this number to make calculations easier. This would mean you are in the 28% tax bracket. Assuming no deductions etc, you will pay the IRS $18k, and that doesn't even include Social Security, FICA, etc taxes (also known as payroll taxes). You are looking at $80k of money after personal income tax. Sounds like alot, but again, I didnt even include payroll taxes. Assuming taxes do jump, you will have less money to spend. Less money to spend equals slower economy. We are a consumer driven economy, so if the consumer has no cash, then the economy sputters. The Government has more of your cash. It will spend on what it deems necessary. Which, if you really are a free enterprise individual, why would you want someone spending your hard earned money for you? This brings up a huge debatable issue, the transfer of wealth. Should wealth stay with the individual or should wealth go to an entity that decides how it spends YOUR money? So instead of raising taxes, consequently putting our economy into a worse situation, why not let the free market work itself and have government live within its means just like the free market is doing NOW.

So should we be scared of inflation? Barring tax increases, not really. The free market has balances. If the FEDs see any sign of inflation, they will have an FMOC (Federal Open Market Committee) meeting and figure out what the interest rate window should be. You increase interest rates, you consequently bring back money from the system into the reserves. I'm not saying this won't hurt lending, but we've been here before. Paul Volcker anyone?

Hope this explains alot :)