Current State of the Economy
I recently witnessed first-hand a bank run in the UK. While I’ve long believed the global economy cannot continue the way it is, I never thought I’d see a real life bank run.
A bank run is when customers withdraw their savings en masse because of fear a lender will become insolvent, which can cause it to go bankrupt.
A similar thing happened with Countrywide Bank in California on Friday 17 August. This after they were forced to draw the entire $11.5 billion line of credit available to them. Since then, Bank of America has bought $2 billion of Countrywide stock, effectively saving them.
On Friday 14 September 2007 all the major UK news stations flashed pictures of queues outside the 5th largest UK bank and mortgage provider, Northern Rock. Northern Rock is the first major British financial institution to be severely hit by what most news sources are referring to as a “credit crunch sparked by the US home loan crisis”. Over the weekend, investors managed to withdraw GBP2 billion in cash. That’s £11,574 every second.
Saturday’s Financial Times had a large picture of the same queues with a bold headline saying “Banking turmoil hits the streets“. They softened the headline for their online version of the same story to “Patient queues in very British bank run”
What surprised me were the billboards all over London in the week following the queues, all talking about a ‘banking panic’ and using emotive words like ‘meltdown’.
The entire global economy depends on trust in the system (there’s a long story behind that statement which I won’t bore you with now). A bank run is the first and most visible sign that that trust is being eroded.
Here are some facts not typically reported in the news:
- The 3-month UK Libor rate (the rate banks pay to borrow from each other) is currently 6.8%, the highest it’s been in 20 years. The Euro Libor rate is the highest it’s been since May 2001. What this means is that banks are becoming reluctant to lend to each other, historically the first signs of illiquidity.
- Axel Weber, President of German Bundesbank, said on September 1st “What we are seeing is what we see underlying all banking crises”. This is the first time that a top Central Banker has endorsed the notion that trouble is brewing.
- Jochen Sanio, Germany’s Financial Regulator, warned on August 1st of the worst banking crisis since 1931. Top officials rarely speak out of turn, particularly in Germany. This was in response to the near collapse of German Bank IKB. It was only saved after other German banks promised EUR11 billion in credit facilities.
- Credit Suisse said on August 15 that the global financial order could be on the cusp of a “system changing crash“.
- Gold is currently above $700 and silver above $12. In the past, bank failures have always led to a flight from the currencies affected to safer investments, thus pushing up the price of precious metals.
- Oil is at record highs, just over $80 per barrel.
- Since mid-August, Central banks around the world have pumped US$325 billion of emergency funds into the banking sector to enable banks to continue normal lending practices.
- The European Central Bank injected EUR211 billion into the system over just 4 working days in August.
- Ben Bernanke said on August 31 “The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets”.
- Kathy Lien from DailyFX.com says “The Fed cannot keep ignoring the fact that the subprime and credit crisis has indeed hit the real economy”.
- Alan Greenspan has likened conditions today to conditions in the US in 1834 and 1907 - both of which were classic bank runs. Does anyone else see the irony that todays financial system collapse is almost 100 years to the day from the Panic of 1907 - the credit crisis that instigated the Fed’s founding.
- The US Treasury has a self-imposed level of allowable debt at $8,965 billion. On September 5 the total US debt climbed to within $46 billion of this limit. In the 10 years ending in 1982, this same debt level increased from $450 billion to $1.1 trillion. It’s now almost $9 trillion. It should hit the limit by early October. It was last raised by $781 billion on March 16, 2006.
- The US Federal Government recorded a $1.3 trillion loss last year, which equals $11,434 per household.
- The US$ index is below 80.00. This is only the second time this has happened in 15 years.
- The US$ is at it’s lowest level against the Euro since the Euro’s introduction in 1999.
- Over the weekend, European Central Bankers discussed how countries should react if a bank which spans multiple countries fails i.e. which governments should step in. No decision was reached.
- A number of investment funds (I know of 6) in the US, Europe and Australia have closed because investors were cashing out too quickly. Historically, a run on investment funds is a precursor to a bank run.
- The FOMC is meeting on the 18th. Many say that interest rates must increase, else the dollar will disappear into hyperinflation, with the market crashing into nonsensical dollar values. If interest rates are increased, however, the resultant increased cost of doing business alone will crash the market.
Interesting times.
Wait, There's More!
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