A Frightening Build-Up

Although there are many reasons why it was not a good idea to keep dead and dying businesses alive, to spend and borrow hundreds of billions of dollars for ill-conceived stimulus programs and other boondoggles, to keep interest rates at record lows for an extended period of time, and to encourage people to hang on in hope that a recovery was just around the corner, the biggest issue with not facing the music early on is how daunting the problems have now become. As the New York Times notes in "Crisis Awaits World’s Banks as Trillions Come Due," the scale of short-term obligations that have built-up as a result of the decision to extend and pretend -- or delay and pray -- is frightening, to say the least.

FRANKFURT— The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.

The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.

Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.

“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.

U.S. banks must refinance about $1.3 trillion through 2012. While that sum is nothing to scoff at, analysts seem most concerned about Europe because the banking system there is already weighed down by the sovereign debt crisis.

How banks will come up with the money is an open question. With investors worried about government over-indebtedness in Greece, Spain, Ireland and other parts of Europe, many banks have been reluctant or unable to sell bonds, which they typically use to raise money that they lend on to businesses and households.

The financing crunch has its origins in a worldwide trend for banks to borrow money for shorter periods.

The practice of short-term borrowing and long-term lending contributed to the near-collapse of the world financial system in late 2008 when short-term financing dried up. Banks suddenly found themselves starved for cash, and some would have collapsed without central bank support.

Government bank guarantees extended in response to the crisis also inadvertently encouraged short-term lending. The guarantees were typically only for several years, and banks issued bonds to match.

Other banks took advantage of the gap between short-term and long-term rates, borrowing cheaply from money markets or central banks and lending to their customers at higher, long-term rates.

A study in November by Moody’s Investors Service found that new bond issues by banks during the past five years matured in an average of 4.7 years — the shortest average in 30 years.

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Comments

[Blurtman]

From underappreciated John Boorman classic Zardoz:

"Zardoz: You have been raised up from Brutality, to kill the Brutals who multiply, and are legion. To this end, Zardoz your God gave you the gift of the Gun. The Gun is good!
Exterminators: The Gun is good!
Zardoz: Penis is evil! The Penis shoots Seeds, and makes new Life to poison the Earth with a plague of men, as once it was. But the Gun shoots Death and purifies the Earth of the filth of Brutals. Go forth, and kill! Zardoz has spoken."

So, kill the bankers. It is us or them.

[sharonsj]

I still find it fascinating that all this crap is happening in 2012. With any luck, instead of the end of the world it will be the end of the bankers.

[we allowed this]

The Con of the Decade Part II (July 9, 2010)

The con of the decade (Part II) involves sheltering the Power Elites' income while raising taxes on the debt-serfs to pay the interest owed the Power Elites.
The second part of the con is to mask much of the Power Elites' income streams behind tax shelters and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective rate paid on total income is much much lower.

The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds and of course special one-off tax breaks arranged by "captured" elected officials.

http://www.oftwominds.com/blogjuly10/con-of-decade-pt2-07-10.html

[Tyler Elliott]

Does one ever kinda get to the point where you just want to see the Titanic finally sink into the ocean?? I'm certainly getting that way with this economy.

[Chip in central Texas]

Monetary musical chairs with termite-infested chairs to sit on?

My wife worries that I spend too much time on gloom and doom news..... Unfortunately, it's that or lies.... hmmm

I'm in advertising / marketing and can count on one hand the optimistic business owners I have visited in the past 12 months. They're realists who can see what's happening and where it's all headed and they are properly frightened at how large the problems are and how small they are.

If all that wasn't bad enough, now I have some (off the record) news from a well placed friend at our regional IRS office. Employer 941 tax deposit delinquencies skyrocketed at the end of the 2nd quarter. With 100% penalties, things have to be pretty bad for a business owner to not get those in on time.