Friday, January 23, 2009
I continue to write forcefully on today's economic and social events as much to inform others as to clarify my own thinking and understanding of these events. I would urge any readers to seek out their own oracles and data sets and come to their own conclusions. Cast an especially wary eye at government and corporate leaders and believe no bankers. We are in the midst of what I will call today The Great Delamination. You may call it what you wish. This recession or depression seems to be worsening by the day both here and in the rest of the world. Social unrest and street protest is springing up in coutries with little history of that sort of activity. Like Iceland and Latvia for example. The street protests outside the Parliament in Reyjkavik have become larger and more virulent with fires and garbage and flying skyr , their local yoghurt. They have been
demanding accountability from their prime minister and their elected officials and new elections. Until today the parliament has ignored them. But 5000 skyr flinging citizens finally had an effect. Prine Minister Geir Haarde has announced he will step down and call for new elections in May. Over in the US Senate Chuck Schumer and Richard Shelby are calling for $110 Million to be spent on hiring new FBI and SEC staff to go after the obvious fraud of Wall Street and the banking industry officials who have brought the US to the brink of financial ruin. They will attempt a "claw back" of the hundreds of billions essentially looted from taxpayers , investors and depositors. This will not"fix" the current disaster but finding another way to fund bailouts beside stealing it from our children seems like a good first step. As I wrote in a previous blog:"Let them be known. Let them be hated. Let them be hunted for the remaining days of their miserable lives." I hope that the first person they subpoena will be our former Treasury Secretary.
An ominous statistic I read from Jim Jubak over at msnmoney.com was sobering. The good old Federal Reserve is looking wobbly. On Jan, 16, 2008 the Fed had $868 Billion in "reserves" of which 84% represented T bills and notes which are even today considered pretty secure reserves. One year later on Jan 14th, 2009 the reserves had ballooned to $2.1 Trillion. T bills now had dropped to a paltry 23% of reserves. As you may know, the fed has been out buying up commercial paper and swapping T Bills for toilet paper in the form of CDO's from our insolvent banks.
However, I am beginning to see some hopeful signs . Some prominent academics and economists are suggesting that some of the banks may need to be nationalized. I continue to try to dig up more information on what I will term the Swedish Solution . I found a pdf from a symposium in 1998 at the FDIC which dealt with how the FDIC and RTC responded to the savings and loan debacle of the 1980's. Tucked into that meeting was a presentation by Arne Berggren, a consultant from Stockholm. Here is the link and his presentation starts on pg 3:http://www.fdic.gov/bank/historical/managing/sym1-09.pdf.
It seems that in the late 1980's, Sweden went through a deregulation of banks much like the US combined with a run up in debt and explosion in the property market. Sound familiar?
In just a 2 year period from 1989 to 1990 their percentage of debt to GDP went from 90% to 140%. Nordbanken, the largest bank had an asset base equal to 23% of GDP. The Swedish government fully nationalized Nordbanken and it took an amount equal to 3% of Sweden's GDP to fully recapitalize it. The important thing to remember is that it worked and eventually the bank was resold and privatized at almost no ultimate cost to the Swedish taxpayer. Keep in mind that at the time Sweden had no FDIC deposit equivalent and all countries are different and comparisons are odious but there are similarities between our two economies and lessons we could almost certainly use as we grope for solutions. I hope that some of Obama's advisers are looking at the Swedish Solution. But I fear the worst. I think there is a chance that events are proceeding at a pace faster than the Fed's printing presses can keep up.