As to the statement “But the 34% bounce back in the BIX since July 15 may be nothing more than a big sigh of relief that bank results were not meeting the most bearish of doomsday scenarios” — a quote from Reuters may add some value to the discussion.
http://www.reuters.com/article/marketsNews/idUSN1838517320080718
“TORONTO, July 18 (Reuters) – The huge recovery posted by Canadian financial stocks this week is actually a bad sign for the sector, as bear markets bring big bounces, Merrill Lynch economists said on Friday.”
A big GAIN is a big BAD sign?
This is an indicator of how bad things must be when economists at Merrill Lynch say things like this.
I agree with Paul: “So you could argue that banks were overbought last week.”
Fractional Reserve Banking is a relatively modern invention — along with fiat currencies (paper money).
It may not seem apparent to most of us but even with regulatory oversight and with government-mandated reserve requirements, there is risk in the stodgy old banking business.
And this was true even before some banks and near-banks went decidedly un-stodgy and nutty in the Wholesale Mortgage Business and in underwriting Derivates and in creating novel Financial Instruments (along with the Wealth Management sides of their businesses) — oh but for the “good old” days of the 1933 Glass-Steagall Act which President Clinton repealed in 1999. Will we get a new Glass-Steagall Act?
This risk has never really been widely acknowledged or recognized. In fact, with all the legislation passed during the Depression, most observers would maintain that risk in the mainline part of the Retail Banking Business was manageable. Except I suppose for those inconvenient once-in-a-hundred-year storms?
When one person’s loan is another person’s loan is another person’s loan etc. anything is possible when a Huge Debt Mountain begins a ‘Credit Implosion’. The money multiplier effect works in reverse when deposits are shrinking.
But so long as overall system credit is expanding, the risks are low.
But with fractional reserves, there is risk in a contracting credit situation that loans get called because deposits are withdrawn. Subject to the FED printing shiploads of money, a contraction can become self-fulfilling.
From http://www.rgemonitor.com/blog/roubini/208166/
“Specifically, the crucial macro question that we should ask ourselves today is whether we are at the peak of a Minsky Credit Cycle. Or as the UBS economist George Magnus – an expert of financial instability – put it: ‘Have we reached a Minsky moment?’”
http://www.risklatte.com/minsky/interviewcontent070828.php
I personally think that the financial sector will be challenged for some time — how long I don’t think anyone knows. But it will likely be a ‘thousand cuts’ kind of process rather than revenues falling off a cliff.
Confidence is not the real problem — soundness is. Confidence derives from a sound system.
The banking industry has completely forgotten their fiduciary duty to protect their depositors. Then again, why should they when the Fed has virtually eliminated the concept of moral hazard? The biggest crime in all of this though, is that the “experts” didn’t see this coming years ago. When home prices jump 20% per year and people are taking bus tours to buy multiple homes, doesn’t this set off a warning bell? The regulators are just as much to blame in all of this for not asserting their authority. Mark my words, Mr. Greenspan will go down in history as one of the worst Fed Chairmen. This crisis is hardly over.
They rip us off at the bank… now we have to bail them out when we ourselves are hurting?
I think not… Let them die.
Yes, and no. For the banks with no or limited exposure to mortgages, the worst is now behind them. For the banks with high mortgage exposure (especially sub-primes, HARMs, Alt-As, etc.) the worst is still ahead, as only about one-third of those loans have reset to the much higher rates. Some of these banks will close, their shares will go to zero, but the insured depositors will be protected, like IndyMac. If there is a little bit of sunshine in this situation, the vast majority of those mortgages were packaged up and sold off to extremely wealthy investors, hedge funds, foreigners, etc. who easily can absorb these losses and still keep going, due to their billions of dollars in mostly private holdings. This will end up being a very large transfer of wealth from the very rich lenders back to the poor borrowers, which would not be a bad thing for our economy right now.