The Cobden Centre - Money printing is the only thing keeping the system afloat

A rather sober, but coherent look at where we are and where we are going, regardless of who wins the Presidency. Whoever wins is still going to be saddled with the "mad money printer".


from the cobdencentre.org
http://www.cobdencentre.org/2012/10/money-printing-is-the-only-thing-keeping-the-system-afloat/

Posted: 15 Oct 2012 12:15 AM PDT Last Monday GoldMoney published my article showing the frightening growth in money-quantities for the US dollar. In that article I stated that the hyperbolic rate of increase, if the established trend is maintained, is now running at over $300bn monthly, while the Federal Reserve is officially expanding money at only $85bn. The first thing to note is that the Fed issues money because it deems it necessary. The hyperbolic trend increase in the quantity of money is a reflection of this necessity, implying that if the Fed's money issuance is at a slower rate than required, then strains will appear in the financial system. There are a number of reasons behind this monetary acceleration, not least the need to perpetuate bubbles in securities markets, but there are three major underlying problems. Government spending Federal government spending is accelerating, due to rapidly escalating welfare commitments, not all of which are reflected in the budget. Demographics, particularly the retirement of baby-boomers, government-sponsored healthcare, and unemployment benefits are increasing all the time; yet the tax base is contracting because of poor economic performance and tax avoidance. Furthermore, state and municipal finances are dire. Economy The US economy is overloaded with debt to the point that it no longer reacts positively to monetary stimulus, and successive government interventions have led misallocation of economic resources to accumulate towards crisis levels. The private sector is now teetering on the edge of an abyss, overloaded by both debt and government intervention. Commercial banks The banks are cautious about lending to indebted borrowers, and they have failed to adequately devalue collateral against existing loans. The result is that with no bank credit being made available to support renewed buying of assets, asset valuations are constantly on the verge of collapse. Put another way, banks have backed off from creating ever-increasing levels of debt to perpetuate the pre-crisis asset bubble. One should not take comfort in attempts to improve asset ratios. According to the Federal Deposit Insurance Corporation, the ratio of total assets to risk-adjusted Tier 1 level capital is currently 11.25; but this does not adequately reflect off-balance sheet activities and non-banking business such as derivatives. The inclusion of derivatives on US bank balance sheets as a net as opposed to gross exposure seriously misstates actual risk. Banks therefore face two different problems. An on-paper write-down of collateral assets of less than 9% wipes out the entire banking system, with a far lower threshold for many banks. Changes in GAAP accounting rules over asset valuations in the wake of the Lehman crisis have allowed them to hide losses, a situation that is still unresolved and suggests the banking system is already close to the edge. Furthermore, any failure in the derivative counterparty-chain threatens to trigger a collapse of the larger banks where derivative exposure is concentrated. Conclusion We are in the eye of a financial storm, for which the only solution – other than mass default – is an accelerating supply of money. Deteriorating financial conditions in either government, banks, private sector or securities markets are almost certain to trigger a run on the others. And that is why a far larger figure than QE3's $85bn per month may be required to keep the system afloat. ---- IMO, until this ratio turns around, the economy in general and unemployment in particular will not improve. If business small and mid-sized cannot access capital from the commercial banks, it will be a long, slow period ahead for the consumer. And all indications are that they will not be able to as this number is still trending badly, even for those banks consider "healthy" by this ratio. This partly explains why the money that has been previously been "printed" via the previous QE programs has not made it's way into the economy. It's trapped on banks balance sheets. from investinganswers.com http://www.investinganswers.com/financial-dictionary/ratio-analysis/texas-ratio-2619

What It Is:

The Texas ratio was developed by RBC Capital Markets' banking analyst Gerard Cassidy as a way to predict bank failures during the state's 1980s recession. The ratio is still widely-used throughout the banking industry.

How It Works/Example:

Cassidy's original Texas ratio formula is:

Texas Ratio = (Non-Performing Loans + Real Estate Owned) / (Tangible Common Equity +Loan Loss Reserves)

The Texas ratio is determined by dividing the bank's nonperforming assets (nonperforming loans and the real estate now owned by the bank because it foreclosed on the property) by its tangible common equity and loan loss reserves. Tangible common equity is equity capital less goodwill and intangibles. As the ratio approaches 1.0, the bank's risk of failure rises. And relatively speaking, the higher the ratio, the more precarious the bank's financial situation.

Some analysts consider it appropriate to use a modified version of Cassidy's formula in order to account for any government-secured loans that a bank may hold. For example, if a bank owns anonperforming loan that is guaranteed by a federal loan program (VA, FHA, etc), the bank is not exposed to losses on that loan because the federal government will compensate them for any losses. Therefore, in most cases, it is appropriate to adjust the Texas ratio by subtracting the dollar amount of government-sponsored loans from the numerator:

Modified Texas Ratio = (Non-Performing Loans - Government-Sponsored Non-Performing Loans + Real Estate Owned) / (Tangible Common Equity + Loan Loss Reserves)

All of the inputs needed for the Texas ratio are reported to the Federal Deposit Insurance Corporation(FDIC) by member banks on a quarterly basis. Every quarter, the FDIC discloses the number of banks on its "problem banks list." The FDIC doesn't release the names on its list, it only says how many banks are on it. But it's widely believed that some version of the Texas ratio forms the basis for the FDIC's list. 

Click here to see InvestingAnswers' list of The 359 Safest Banks in America. 

Or to learn how to use the Texas ratio to see if your bank is in trouble.

Why It Matters:

The Texas ratio takes into account two important factors in a bank's health: the number of bad loans it's made and the cushion the bank's owners have provided to cover those bad loans (i.e. common equity).

If too many of the bank's loans are nonperforming (as described by the Texas ratio's numerator), the bad loans will erode the bank's equity cushion, which could cause the bank to fail. 

Likewise, if there is not enough equity in a bank (as described by the Texas ratio's denominator), the bank will not be able to absorb very many bad loans and the bank will fail.