"Good-day, Banks! How's the world of finance these days?"
Mr Banks: "Excellent, Admiral. Credit rates are moving up, up, up, and the British pound is the envy of the world."
Later in the movie, in a scene at the bank, Mr. Banks has introduced Jane and Michael to the chairman of the bank, the elder Mr. Dawes, who represents the stodgy old British banking system of the time. Mr. Dawes, in explaining to the children the value of depositing their "tuppence", proclaims:
"While stand the banks of England, England stands; when fall the banks of England, England falls!" At which point he shakily falls backward into the arms of the other old stodgy directors.
I was reminded of these scenes as I watched the evening financial shows last night. Amidst the carnage on Wall Street yesterday, the biggest news was the biggest loser: Bank of America. The B of A is the first among many of the large banks that profited enormously during the housing bubble, and is now being drowned in the sea of red ink and mortgage defaults left in the wake of that bubble. Bank of America shares plunged 16% yesterday to lead the S&P 500 on its way down yesterday's free fall. The New York Times explained it this way:
"Bank of America is leading banks back into the mortgage abyss. The nation’s largest financial institution by assets shed over $16 billion of market value on Monday as its shares fell 20 percent after the downgrade of the United States credit rating, and a home loan lawsuit filed by the American International Group, the insurer. Other mortgage-heavy lenders were hit, too, but none as bad as Bank of America.
So the link between the precipitous decline in our stock market and the dead housing market becomes clearer. Mortgage lending to risky borrowers, as mandated by our government in the 90's and the last decade, allowed enormous profits at the higher mortgage rates these borrowers were forced to pay to "own their own home", at least as long as those borrowers were paying; but now that more than two million have defaulted nationally, and several million more are in the process of defaulting, the largest lenders find that it is time to pay the piper.The bank, led by Brian T. Moynihan, now has fingers in nearly a fifth of the country’s home loan market. Another recession wouldn’t just crimp earnings power. It could also lead to fresh losses on $1 trillion of problematic loans the bank owns or services — or both. Citigroup, where troublesome mortgages account for the largest chunk of its $300 billion in unwanted assets, had its shares tumble 16 percent on Monday. Midsize lenders like SunTrust, Regions and Fifth Third weren’t far behind." - NY Times, 8-8-11
Sure, there are other huge reasons the stock market is tanking...but at their core, they are all related to debt. Either government-related debt due to unsustainably high social benefits, or private debt due primarily to housing-related over-borrowing all over the world.
And as we survey the wreckage of the global economies, the wisdom of the Mary Poppins bankers stands at odds with everything we are witnessing today. Credit rates are not going up, up, up; in fact, banks can hardly give away money now at historically low rates, because there are very few credit-worthy borrowers out there these days. The American dollar is no longer the envy of the world, except in the sense that other countries envy the way we can continue to print it. And as the banks of America fall, so falls America.
The phenomenon is spreading like a viral disease...
"The housing boom in Australia is now an escalating bust. Many Australian homeowners put every cent they had into their homes and they needed double incomes to just scrape by. Unfortunately, those jobs are disappearing in a construction and commercial real estate bust. " - Mike Shedlock, Townhall.comWhat has to happen? Well, the bottom has to be hit...large companies and national economies have to be allowed to fail, or the efforts to save them with bail-outs will only make matters worse. On our current course, with governments trying to save all the big economies, we're all doomed to fall in the long run, and that path is being littered with small companies that are failing along the way because they have no one bailing for them.
One thing that has to happen, for sure, is that housing prices have to hit bottom and begin to rebound. So much economic growth is based on housing regaining at least a portion of its value that it is hard to exaggerate the key role of the housing industry. We have experienced our own housing disaster, as have the Europeans; we see above that it is hitting other countries like Australia that seemed immune from it; and we discussed here before the ghost cities of China.
Well, we can all tighten our seat belts and wait for it all to hit bottom, even as our governments struggle against gravity.
Or, we can re-engage private investment in the game. Next time...