Article

2008-04-09 Home Front Economy

Fed Auctions Another $50 Billion to Cash-Strapped Banks

Archived material is restricted to Rantburg regulars and members. If you need access email fred.pruitt=at=gmail.com with your nick to be added to the members list. There is no charge to join Rantburg as a member.

Posted by Steve White 2008-04-09 00:00|| || Front Page|| [3 views ] Top

#1 Including and espec WAMU {Drudge] - Why, Virginai, am I NOT surprised???

Posted by JosephMendiola 2008-04-09 00:16|| 2008-04-09 00:16|| Front Page Top

#2 The real problem is a bank capital squeeze caused by bad loans.

A bank is required to have a capital to loans ratio of around 6% - i.e. they need 6 cents of their own money or every dollar they lend. Most banks have capital ratios around 8% to 10%.

When a loan goes bad, the money to repay the lenders comes out the banks capital (or reserves which is capital set aside for this purpose).

In simple terms, for every 1% of loans that can't be recovered, the banks capital is reduced by 1%.

A bank that starts at 8% capital, only has to have 2% of its loans go bad for it to reach the 6% capital threshold. At which point it is deemed to have insufficient capital for its loans, and must either reduce its loans or raise more capital (sell shares).

As banks reduce lending, the value of assets falls and more loans go bad.

The thinking behind flooding the banks with cheap money is to make them keep lending and hence stop asset prices falling. And hence give banks time to solve the problem.

I'm sceptical but we shall see.

Posted by phil_b 2008-04-09 02:13|| 2008-04-09 02:13|| Front Page Top

#3 The Japs have tried this approach for the last 15+ years after the collapse of their property bubble. It hasn't worked all that well for them. I don't think it's going to work all that well for us either, although the alternatives look worse.

Posted by Pancho Elmeck8414 2008-04-09 04:33|| 2008-04-09 04:33|| Front Page Top

#4 The problem with banks severely restricting their loans is that many businesses depend on loans to stay in business. No loans, and these businesses will stop operating or go out of existence, even if they are in good operating condition otherwise. This happened repeatedly in the US during the Panics of the 19th century, and was something the Fed was created to prevent.

Posted by Anguper Hupomosing9418 2008-04-09 07:35|| 2008-04-09 07:35|| Front Page Top

#5 When a loan goes bad, the money to repay the lenders comes out the banks capital (or reserves which is capital set aside for this purpose).

Sort of. Wonder why credit card rates remain high decades after the double digit inflation that took off during the Carter years? Particularly since the Fed rate the banks themselves borrow at has been around 5 per cent for nearly a decade. That because the banks have thought nothing of issuing cards to bad or no credit borrowers because they the banks don't take the hit. They simply have everyone else carry the loses. The banks don't pay, the average person pays for the banks improper handling of credit through the high interest rates.

Back before the Carter inflation hit, most states had usury laws with limits on how much interest banks could charge. The rate of inflation quickly out paced those ceiling. So the bank held a proverbial gun at the head of state governments to the effect that unless the ceilings were altered, there would be no lending. The state legislative bodies [many of which were populated by people with local ties to the influential bankers of their districts] simply eliminated the ceilings rather than make the rates adjustable tied to the Fed rate. So what happened when during the Reagan era inflation was brought down to 5 percent or less. Interest rates stayed sky high. So how were the banks operating before the inflation without those sky high rates? For one thing credit cards were hard to get, but they were in business. On the other hand, we weren't expected to bail them out by dumping a half a trillion dollars on the market to cheapen every dollar held by every American.

Posted by Procopius2k 2008-04-09 08:26|| 2008-04-09 08:26|| Front Page Top

#6 "Auction" me a couple of Billion, I've got $500 or so to put up for Collateral.

Posted by Redneck Jim">Redneck Jim 2008-04-09 15:02|| 2008-04-09 15:02|| Front Page Top

#7 So I guess the secret for me is to figure out how I can also irresponsibly get billions of dollars in debt so the Feds can bail me out?
Honey! grab the plastic! We're goin shopping!!

Posted by tu3031 2008-04-09 16:01|| 2008-04-09 16:01|| Front Page Top

23:14 anymouse
22:54 Atomic Conspiracy
22:51 DMFD
22:46 Barbara Skolaut
22:17 JosephMendiola
22:10 BA
22:09 Atomic Conspiracy
22:05 BA
21:59 Atomic Conspiracy
21:54 JosephMendiola
21:42 Atomic Conspiracy
21:41 Old Patriot
21:40 Skunky Glins5285
21:37 JosephMendiola
21:23 JosephMendiola
21:21 Old Patriot
21:17 Old Patriot
21:11 JosephMendiola
21:09 Pappy
21:03 Frank G
21:00 Skunky Glins5285
20:53 DarthVader
20:51 Skunky Glins5285
20:39 Penguin