Monday, November 1, 2010

The Big Week

In thinking about what I was going to post this morning, the two obvious hot topics came up: the US mid term elections and Ben's upcoming QE2 on Wednesday, both of which I'll cover below. But as I looked at the morning's financial news, something so astounding and right jumped out at me. The Governor of the Bank of England, Mervyn King, has proposed changes so astounding that it quite obviously made my headline. The good Governor has proposed four reforms:

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.

2. The Volcker Rule: enforcing the breakups of banks into standard and speculative arms.

3. The Kotlikoff Rule: forcing banks to match each pool of risks with an adequate reserve of capital and preventing losses in one arm from spilling over into another one.

and the duzzy:

4. "Eliminating Fractional Reserve Banking explicitly recognizes that the pretense that risk free deposits can be supported by risky investments is alchemy. If there is a need for genuinely safe deposits the only they can be provided, while ensuring that cost and benefits are fully aligned, is to ensure that such deposits do not coexist with with risky assets"

To wit: In the current system we all have, for every dollar deposited in a bank, the bank is entitled to loan out 10 dollars. This produces what's known as a 10-1 leverage ratio. If the bank therefore loses 1/10th of their loan portfolio, the bank is toast. In Europe, this figure approaches 40 and 50-1. In bigger US banks, the ratio is about 25-1. This system is how we hopelessly indebted ourselves. King's proposal would eliminate this.. for every dollar in the bank, the bank can loan out only that dollar.

Back here in the US, Ben Bernanke has talked about going the exact opposite direction: "The Federal Reserve believes that it's possible that, ultimately, it's operating framework will allow the elimination of minimum reserve requirements, which impose cost and distortions on the banking system"

My belief is, quite obviously, that fractional reserve banking must end, as do all leveraged transactions. It's these two things that blew up Wall Street.. and the problems are still there. The current system allowed our nation to hopelessly indebt itself. King's solution, if imposed, would make it impossible to so indebt ourselves. For even suggesting these things, I believe Her Majesty should Knight Mervyn King. He probably recieved an ugly text message from Ben this morning.

Which brings us to Wednesday morning.. Ben Unleashed. The question of the day.. how much. Ben's idea is to do it BIG TIME. But according to his mouthpiece {Jon Hilsenrath of the WSJ} he seems to be running into some serious resistance from the other Fed Governors and possibly China, who owns over $2 trillion in USD denominated assets and would'nt like to see then depreciated by 10% just this week. So.. my fearless prediction: $600 billion over the next six months, with a note attached saying that more maybe necessary. Look for Japan and others to either pick up the pace of money printing to keep up or impose yet more capitol controls. At the end of the day, this money has to go somewhere.. and the stock markets are the likely recipients. But none of this will actually trickle down here to us serfs. For us, the price of gas and food will continue to creep northwards and the unemployment rate will remain stubbornly high. For us, there is no recovery. For Wall Street and Government, however, the recovery is going splendidly.. bonuses and benefits have never been better.

Now onto the last hot topic.. the US elections. It's known here in the States that the Republicans will body slam Obama and the Democrats; it's a near certainty that the US House of Reps will go over to the Republicans, with a slim chance of the Senate going over as well. I fully believe this as well.. the House will flip, but the Dems will maintain a slim majority in the Senate. This will bring about a few changes: first, there will be no more stimulus or bailouts. Second, Tim Geithner is likely going to be sacrificed, and rightly so. There is also the chance that ObamaCare will begin to be hacked down piece by piece.

Can we make Mervyn King our King ?


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