Guest Post: Exposure At Default - As Banks Shrink, So Does The Economy

Tyler Durden's picture

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Anonymous's picture

"Bottom line is that deflation is still the chief threat to the US economy"


Anonymous's picture

The trade off btwn 100% reserves and fractional banking isn't the only trade-off a society makes. Just how much credit should be available to an economy? If our economy grew on too much credit, maybe we're shrinking back to right where we belong, and what our correct std. of living should have been all along. It didn't much to see that we've moved from a humble "chicken in every pot" to a voracious granite counter-top and "stainless steel" range in every kitchen. But don't listen to me. I save old rubber bands, re-use aluminum foil, and have a 10 year-old car. Yet somehow, I think most people would trade my financial situation for theirs.


ZerOhead's picture

Genius or Moron...

Wants to be the next Roubini if the impossible occurs methinks.

McGriffen's picture

Excellent points...that Tishman/Stuyvesant deal just seems a little goofy, but then again that's a top signal if ever there were one.

cue random talking head..."the yield curve is steep"..."low short term rates"...

Anonymous's picture

Meanwhile, the fat pig at AIG, Benmosche, who railed against "socialist agendas", wants to fly the corporate jet for personal use at taxpayer expense.

Anonymous's picture

I've been reading Chris for quite some time. He always provides good solid thinking and interesting information from the all important risk management side of the Banking complex. Chris has been talking about regulatory arbitrage with Marty Mayer for years, and he has been on the JPM as the heart of the Fed relever the credit markets strategy story and the JPM OTC printing press.

Everything Chris writes is a must read. Well done. I also gather that the kids at the Fed and the Treas are reading Chris. Will anything be done to rectify this train wreck of policies and markets? Will they act upon it?

Miles Kendig's picture


The answers I suspect are a no.  At least not in a way that in any way impinges upon the TBTF institutions.  I suspect we will see continued policy of driving the small and medium sized banks into an FDIC & international standards of liquidity contrived failure all in the name of supporting TBTF by removing competing alternatives to the oligarchs.

Mako's picture

The US credit system is collapsing... new data from the fed Z1 just released.  It's over folks.

Review from Q2 numbers just released

Review of history of the numbers

Full thread

Anonymous's picture

From just released Flow of funds data by Federal Reserve

During second Quarter of 2009,

Household debt: Contraction by $233 B
Business debt: Contraction by $202 B
Financial Sector debt: Contraction by $2079 B

Federal Govt: Increase by $1900 B
State and Local Govt: Increase by $190 B

ph012's picture

What a long rambling piece... and what did it have to do with deflation?

Chumly's picture

A lot!  Who in the hell is going to lend (or borrow) in a deflating economy?  I hope you understand that as a rhetorical question ; )

MPD is already running circles around QE to the tune of -4% (maybe more - who knows, it's hard to figure with an estimated $1 Quadrillion+ in credit derivatives or whatever).  The matter is essentially moot.  What they do at this point and henceforth will only contribute to the intensity of any future deflation.  

Anonymous's picture

"Bottom line is that deflation is still the chief threat to the US economy..."

It is for now. But eventually the rest of the world is going to wake up and begin to dump their dollars.

When that dollar tsunami hits we're going to need a lot more 'zeroes'.

deadhead's picture

I've read IRA for quite some time....solid information.

Thanks for posting this one TD. 

Cognitive Dissonance's picture

The first time I head Chris Whalen of IRA speaking on CNBC a few years ago I thought I was hearing things because here was someone speaking truth without sugar. Chris made sense then and still makes sense now.

Needless to say, he isn't invited back very often to CNBC but when he is I can tell he holds his tongue a bit for fear of scaring Joe, Becky and Carl too much.

I remember back in January he was talking about the coming (additional) problems with regional banks and Becky Quick's mouth was hanging open, her eyes were vacant and she was speechless. Joe looked white and Carl appeared ready to go home.

Anonymous's picture

Great comprehensive view of what the big banks AREN'T doing.

So if not lending what are they doing ? From here it looks like they are trying to trade their way out of some minor percentage of their losses by creating a commodity bubble with taxpayer funding. Good luck with that.

BTW I like to go my local weekly Sheriffs sale, and with incredible consistency only 10% of the properties actually make it out of the banks hands. The remaining properties are either bought back by the banks to become REO or the auction is delayed due to plaintiff.

Bam_Man's picture

The big banks are taking deposits at 0.15% and buying Treasuries.

It is like "printing" money.


Chumly's picture

Ominous.  Pre-quake tremblers are on the rise.  2010 will be a 10.0!!

crzyhun's picture

Blackrook said on CNBC that CRE is not an issue because, 'We know about it.' Bada Bing! Folks if Dennis Kusinich is right about the level of maelfesance in WDC, there is but a few signs of light in a city surrounded by reality. I can count them on one hand, the other one is shaking too much.

Anonymous's picture

What do u think? First HFT then???
Play Volcker calls for restricting banks' risk, trading activity - WSJ : WSJ reports former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation. Mr. Volcker, who currently is chairman of the White House's Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client's behalf instead of making bets with their own money through internal units that often act like hedge funds. "Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," he said in a speech to the Association for Corporate Growth in Los Angeles.

jswede's picture

Chris Whalen may be one of the 2 or 3 most important people to read at the moment.  You want an expert on banking?  It's not Whitney or Roubini -- they are lucky hacks compared to Chris and his analysis.

Some of you are missing the point and getting hung up on the mention of the word  'deflation' and an anecdote on Stuyvesant.  Further, Chris is speaking mostly to institutional investors with experience in bank analysis.  There are many, many understatements in this piece that are not lost on those more familiar.

The point is that the economy will not recover until the banks recover, and the banks are not recovering.  It's one thing to say "oh, the banks are insolvent" and then go worry about the next stock trade, but what Chris is telling you is what the banks are really doing, and why.  When he says "deflation" it's not as a 'tip' to go out and buy USTs, but rather it's in direct reference to continued attrition of bank capital and its consequence of yet less credit availability to come.

As these banks go, as credit goes, so do the prospects of a recovery.  It's in careful analysis of these banks, that we will have the greatest visibility forward.  and Chris's analysis leaves out the noise and cuts to the heart - EaD for example - go read that part again:  this is what matters.  We're conditioned that retail sales and housing are the key -- want to skip all that noise and volatility?  Want to see what's happening excluding stimulus?  Watch EaD etc and read Chris -- there are no headfakes in this analysis -- when it turns, you'll know it.  and it's (obviously) not pretty right now.

McGriffen's picture

excellent point made.  It's easiest to think deflation today, inflation tomorrow...although that could be true.  It could still be deflation for the next 24 months...

Whitney is good to be lucky...but she was right on C and MER before most had a clue.

Anonymous's picture

Yikes...And don't cry for Tishman Speyer, which only put $56 million of its own money into the deal.

Tishman Speyer and BlackRock spent $6.3 billion — the $5.4 billion purchase price and the creation of four reserve funds totaling $890 million — to buy Stuyvesant Town and Peter Cooper Village from the original owner, Metropolitan Life.

The deal has become a “poster child” for all that was wrong with that era of easy credit, highly speculative deals and greed, said Ben Thypin, an analyst at Real Capital Analytics, a research firm.

It remains to be seen if its recent troubles will affect the Tishman Speyer image and the willingness of investors to risk their money with the company.

A recent report from Realpoint, a credit rating agency, estimates the property has a value today of $2.13 billion — less than half of what the partnership borrowed to buy it.

The Sunshine State's pension sunk $250 million in Tishman Speyer's acquisition of Stuyvesant Town and Peter Cooper Village, and now, "We are carrying that investment at zero because the market softened dramatically," the executive director of Florida's State Board of Administration said today