The Unraveling


Day One:

Woman Having Credit Card DeclinedThe grocery carts stopped moving, as all the customers listened in on the din from the front of the store. A young mother with three young children was furiously yelling at the check-out clerk. Apparently, the uproar occurred as the clerk would not allow the woman to take her groceries until her debit card was approved or another form of payment was provided. The young woman continued the commotion by shouting that there was money in her account and she needed the milk and food for her babies.

The same situation occurred at the same time down the block, across town, and throughout the entire country. Widespread complaints of customers to store clerks echoed throughout retailers nationwide.

Within only a few hours, freight trucking companies called back tens of thousands of long-haul and short distance delivery trucks, not allowing supplies to be delivered to supermarkets, retailers, restaurants, gas stations, hospitals, etc.

Day Two:

As supply chains break down, restaurants without reserves of food decide to close and retail stores shuttered. Utilities start having problems delivering water, power, and electricity to their customers. The States immediately announce “temporary” widespread electricity, water, and gas rations and subsidized public utilities.

Rumors on social media, television, and radio all referred to a collapse of the U.S. monetary system. Block-long lines formed outside local banks. People tried to withdraw their money, but banks cannot meet their deposits and run out of cash immediately.

Day Three:

Civil disobedience, looting and crime began in every metropolitan area. Gasoline supplies dried up and the airlines grounded their fleets. Public transportation was ‘temporarily suspended’ while truckers became stuck on the sides of highways with the last of their remaining products, but no ability to sell them. Some of them fall victim to random assaults and theft. Civil breakdown spread from the inner cities to the suburbs. Law enforcement could only standby and watch.

and that was just the beginning.


 

Pulp Fiction, right? Except, in September of 2008, the greatest economy in the world, the United States of America, found itself 10 days away from the above events actually occurring.

Most people understand why the crisis occurred. I called it the unholy trifecta:

  1. The financial industry (read Wall Street) lobbied Congress in the 90′s through Robert Rubin and Sandy Weil to repeal the Glass-Steagall Act: a Depression era law created to prevent another economic collapse seen in 1929 by separating investment banks and commercial (main street) banks.
  2. In response to the dot-com crash and subsequent attacks on 9-11, former FRB Chairman Alan Greenspan dramatically lowered interest rates to send a message to world that America was still a safe bet.
  3. Congress (in their infinite wisdom) felt that every American should own a home. They encouraged Fannie Mae and Freddie Mac to start buying up conventional and subprime mortgages, thereby allowing banks to make risky loans.
2007 Lines Of Depositors at IndyMac Bank Trying to Withdraw their Money
Not the Depression – Lines of customers at IndyMac Bank unsuccessfully trying to withdraw their money

In Spring of 2008 the house of cards started to collapse as we saw the end of Bear Stearns. Six months later, the economy fell into complete crisis. Most people — while they knew things were going from bad to worse –were not fully aware of how close the U.S. to the precipice.

While the media were focused on horse race politics (aghast!!! John McCain’s ‘political considerations’ of canceling a presidential debate to head back to DC!), what was happening behind the scenes terrified the most experienced financial service professionals and economists.

The unfolding crisis was painful as the stock market along with real estate collapsed. Except, things were about get a whole lot worse.

New York Fed Chairman (soon to be Obama Treasury Secretary) Tim Geithner was in deep crisis mode. Just six weeks before a presidential election, he and Hank Paulson (Bush Treasury Secretary) forgot politics. They worked together each day with Ben Bernanke (Federal Reserve Board Chairman) trying to avoid the unthinkable.

What if the banks suddenly became insolvent? This was not only a real prospect, it was happening: Lehman Bros. was about to become the next casualty.

What had them so worried? A student of the Great Depression, Bernanke knew that the lifeblood of any economy is cash flow: the movement of money. If banks and financial institutions suddenly find themselves insolvent, the system breaks down. The Unraveling happens quickly and takes no prisoners.

After arm-twisting Nancy Pelosi’s Congress, as well as some reticent Republicans, Paulson pushed TARP through, which provided the much-needed cash infusions into the banks. This allowed the economy to continue, and for most people, their only real concern was watching their personal wealth deteriorate: a relatively minor concern compared to the collapse of the entire economy which would lead to a social breakdown.

Most economists agree that what transpired over six years ago was never fixed. It was merely stitched up with silly putty and Elmers glue.

We are now in our seventh year of the post-crisis economy. While the stock market has doubled, there is no credible source of economic news that suggests the economy has truly rebounded as in previous post-recessions.

Most agree the stock markets jubilant return to it’s lofty heights are due to ZIRP (zero interest rate policy) and QE (quantitative easing), both tools of the Federal Reserve Board to prevent the economy from sliding into recession. The problem with these tools is that they were only viewed as temporary. The Federal Reserve balance sheet of $4.5 trillion – yep, with a “t” — is fueling the stock market which is akin to leading lambs to the slaughter.

Whatever you think of bankers, they are not stupid. 2008 is in their rearview mirror, but not far enough behind to forget about. Many of the same bankers from then are still in positions of power, and they all tacitly acknowledge that QE and ZIRP have artificially inflated the economy. While many of the largest banks are sitting on massive cash reserves, they have kept it sidelined. Business owners are still finding it’s very hard to get business loans from main street banks. Mortgages are not easy to secure.

Banks operate under the guidelines and oversight of the FDIC and FRB. There are several banks that have caused tremendous hardship against their customers by way of illegal actions that only get reported if the customers are knowledgeable about protections afforded them by the FDIC and FRB. Most people do not realize they have recourse to fraudulent appraisals, mafia-like tactics, and blatant gouging through fees. Banks are acting like they are still in survival-mode even though they are flushed with cash.

So after six years of the Fed flushing the banks with cash, why are they not parting with the money, while others may even be acting in bad faith? Financial service professionals seem to all agree, and FRB Chairwoman Janet Yellen has all but stated that it’s a matter of when, not if the Federal Reserve raises interest rates.

What impact will that have on the economy? Even with QE and ZIRP, the GDP is still at a very disappointing annualized 2-3%. Can you imagine what the GDP would be without the Fed’s tools? Bankers know this. They also know one very real and incontrovertible fact: TARP caused the largest banks that were too big to fail in 2008 to become even bigger. Bank of America gobbled up Countrywide; Wells Fargo took over Wachovia; etc.

If another crisis happens — China, Europe, Terrorism, War, etc., could each catalyze one — the economy could very quickly go into crisis mode again. The largest banks which were too big to fail in 2008 have all grown larger. Today, bankers know they are now too big to save.


Dave

Don’t be afraid to see what you see. – Ronald Reagan

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