Sunday, August 17, 2008

The Nightmare is Real

Let's take a look at the state of our countries banking system at the present moment.

There are about 700 banks in our country where people store their hard earned money. It is currently estimated that conservatively about 6% of those banks are in serious trouble. The FDIC has a trouble list that they obviously don't release to the public due to the panic that would ensue. With about 7 trillion dollars in cash guaranteed by these banks, it is estimated that there is about 2.3 Trillion dollars unprotected by the $100,000 FDIC insurance.

Before we continue on, without trying to scare anyone, let me just say if you have over $100,000 stored in a single bank account you should seriously consider spreading that money out over multiple banks. The FDIC has about 50 Billion dollars to cover bank deposits and about 4 to 8 Billion of that is going to be used to cover the Indy Mac failure alone. Indy Mac was not even a bank on their trouble list. As the losses continue to pour in, the government and the Fed will do everything they can to bail out everyone, but eventually as we get closer to hyperinflation they are going to have to let some of the smaller banks fail and people are going to lose their deposits over $100,000.

What other bailouts? Good question.

Right now 2.3 percent of the homes in this country are in foreclosure. Another 6.4 percent of homes are deliquent on their payments. Based on these numbers Fannie and Freddie should have about 200 Billion dollars worth of their homes in foreclosure. (That number is rising at a rapid clip) When sold back on the market at the going 50% price in most cases, they will lose about $100 Billion. Before the carnage is finished, many estimates show Fannie and Freddie's losses approaching 1 Trillion dollars.

The big salami hanging out there right now is the Credit Default Swap market. Currently, swaps of AAA rated mortgage securities are selling at 50 cents on the dollar. The AA rated mortgage securities are selling at 10 cents on the dollar! The investment banks are loaded with swaps and if they had to write down those losses right now, well, it's hard to even imagine what they would be.

So how are the banks staying solvent? The Federal Reserve has a personal balance sheet of around $850 billion dollars. Every month they are swapping billions and billions of dollars worth of treasuries with the investment banks in exchange for toxic mortgage backed securities. The Fed at this point has used about half of it's $850 billion dollars. Based on the rate of home declines and continuous losses, the other half will be used shortly. This is what's keeping the banks from writing down what would have been their actual losses. They are sending their toxic waste to the Fed month in and month out.

So what happens when the Fed's balance sheet is empty and they have $850 billion worth of toxic mortgage securities and no more treasuries to exchange? They will then start to monetize the losses, meaning they will print new money and exchange that for more toxic waste. What they have taken up to this point are only the mortgage losses, coming next is the tsunami of auto loans and credit card loans that have been securitized. As it is now, all this inflation will be exported around the world to foreign countries raising their cost of living and slowing their growth. This will continue until foreign countries cut off the United States caboose.

After the Bearns Stearns bail out and now with the bail out of Fannie and Freddie the government has showed it's hand. All roads now lead to a hyperinflationary depression which will most likely begin by 2010. At that point the true pain will be felt as the last of the middle class that still believe the government's confidence game will be wiped out. The money will begin it's full transfer to the hands of the rich, and the economy can then begin the final stages of it's collapse. It's going to be a blood bath.

These are only the problems that are now evident on the surface. Underneath this rosy picture, we have now reached the point where including unfunded liabilities like social security and medicare, the country now owes over 100 Trillion dollars. Subprime America baby. Just wait till we start talking about the social security bail out, because that is coming as well.