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It is easier to prevent bad habits than to break them.

                                          Benjamin Franklin

Commentary & Analysis

Now back to important things – feeling bad for the banks …

Did you hear? They’ve agreed to a robust bailout plan that increases the scope and effectiveness of the EFSF. It seems expected to succeed in resolving the crisis and stemming potential contagion.

But will it do anything to prevent a Greek debt restructuring?

And will it put undue pressure on core eurozone countries who are thy brother’s keepers?

Ahhh – who cares?

Now it’s time to devote far more attention than necessary to the US debt ceiling deliberations as the political showmanship won’t allow lawmakers to reach a resolution until the 11th hour. But do not worry, because the US will skirt default … barely.

Ahhh – who cares?

The NFL owners agreed to some form of something that’s now been presented to the players’ association in an effort to end the current lockout and start the 2011-12 NFL season … and on time.

Ahhh – who cares? Sadly (or not so sadly) more probably care about an NFL resolution than a debt/deficit resolution.

On to more important things …

Those dreadful job-sucking ATMs that President Obama warned us about some months ago are threatening again. [If you’re imagining zombie-like automated teller machines shuffling clumsily towards terrified bankers, that’s exactly what I was going for!]

From Reuters:

Banks so far are favoring standard cost-cutting moves to rein in expenses. A big chunk of Wells Fargo Corp’s $6 billion of cost-cutting, for example, is expected to come from improving efficiency through steps like merging data centers and better automating its payment processing …

Why are banks worried about cutting costs? Surely they’ve been shored up by bailouts and Fed QE, no? From Reuters again:

Cost-cutting for now is being triggered mainly by weak loan demand and low interest rates. Higher-yielding loans like mortgages are maturing, only to be replaced by lower-yielding new loans or government securities — if they are replaced at all.

Wait – does this mean consumers are not seeking loans?

Well, for the most part — yes. And many who are seeking loans find now that it’s a little tougher to get a loan than it used to be. This disinterest and inability in borrowing is not helped by the disincentive to lend in what has become a “more uncertain than usual” environment – banks are just parking reserves at the Fed:

Apparently and additionally, many side businesses these banks are involved in are struggling to cover their cost of capital. This means even more cutting for the banks is in order. It seems like a vicious cycle. Awww, poor banks. If only we could do something to help them get through this cyclical period of weak credit demand and low interest rates.


Let’s see:

Banks have the ability to lend out several times more than the amount of money they’re required to have on hand. Their cost of borrowing from the Federal Reserve is miniscule. American consumers have lost buying power via consumer price rises (perhaps transitory) and a sinking US dollar. Home prices are at historic lows. The Federal Reserve has pumped massive amounts of cheap liquidity into the system. And banks are still struggling to make ends meet?

Oh boy. Household credit market debt still falling …

All I have to say is: thank goodness for China. Without China, the banking systems in the US and Europe would effectively contaminate the underlying economies and drag the world into recession.

Wait … nevermind. I almost forgot that Jack just wrote a report outlining why China could very well collapse in the coming months or quarters (rather than save the global economy as we know it). He also made note of why it would be extremely deflationary should such an economic decline commence.

Add that to the lingering deflationary headwinds in the US and Europe – it’s ugly out there but nobody seems willing to look in the mirror.

Have a good weekend.