be careful, page-18

All these late proposals being touted by US regulators for new Federal entities to be created to deal with the fallout from the crisis shaking financial markets is nothing but GUMP - all too little too late - this meltdown already has legs and no 'proposal' for anything is going to stop it IMO.

What is the one central issue behind a bank becoming bankrupt - it means it can't pay all depositors what was given to them - so this means in one form or another these financial institutions have been lending more than they can pay back to depositors - they have quite simply over extended themselves and no new 'proposals' can fix that reality - only more funds coming from Fed being the exception.

But consider this - Maybe a tad cynical but eminently practical – wouldn’t it be in the Fed’s interest given all the money that it has pumped into the system, to allow the stock market to wipe out billions of dollars for a while longer, thereby removing a whole lot of money from the money supply, thereby helping to curb inflationary pressures brought on by its injecting so much into the market – unfortunately those who take advantage of the money the Fed is injecting are those institutions that started all this – but at the end of the day the Fed needs to be able to tell the common folk and other governments that it’s measures have helped to contain inflation – by letting the market crash a little longer, and wiping out fortunes from punters’ share accounts like mine….. : ( …

The Fed is walking on razors not egg shells I reckon, because if they allow the market to crash for too long, then commodities will only go higher therefore higher inflation will become inevitable – hey, so we may have a vicious Catch 22 brewing also if they don’t pull the right levers in time!

So how did we get into this mess?

Fractional Reserve Banking – where a bank only needs to hold 10% of all the deposits made into it, and where the same bank can loan out 10 times what has been deposited into it – That’s the shortest and easiest way to explain the present global banking system, since the early US banking cartel was put into place about 1933 mind you – (read about the New Deal and the creation of the Federal Reserve System back in 1913 – the real pillars of modern banking).

Anyways, I’m sure the issue of Frac Reserve Banking (Frac Reserve) is lurking right in front of everyone’s faces right now and we don’t know it, and is of course the last thing the Fed or any banker wants discussed openly right now.

The nationalisation of AIG likely had the Frac Reserves issue as being ‘a’ or ‘the’ reason, (but different because they are insurers – but same same for expedience sake), yet of course who would dare admit liquidity issues, as it would cause a run on insurers and ultimately the banks – while more deeply, had AIG been frozen out, a greater part of the US financial system would have been unable, due to the nature of insurance instruments, been unable to transact in any respect for at least 30 days – that’s called a financial seizure - a freeze on global finance - and the Fed wouldn’t have been able to print enough paper to cover 100s of institutions being legally unable to trade in AIG connected instruments – it would have led to total collapse.

If we look at the AIG rescue I think we can conclude that the banks breathed a sigh of relief that the ratings system made AIG blink before the banks had to – had AIG’s rating been downgraded they would have been required to put up more collateral for needed regular loans – lots of $$$ - money it didn’t have – (sounds like a liquidity issue right, but importantly, even had they kept the right type of Frac (insurance) Reserve, it would never have been enough) - anyway this meant AIG needed to go in search of huge loans – why… because they are not liquid… and haven’t been for years – so the Fed comes in and nationalises AIG, but in this instance makes sure that it end up owning AIG - why? – because throwing money at a huge problem (again) while not owning it would have caused a backlash with voters - owning it means it can be sold off later just like the Japanese (equivalent) Fed Reserve did years ago – (and Japan has never truly recovered) - the move ultimately delivers nothings to US tax paying punters, but ‘ownership’ (of an insolvent company) allows the Fed to keep on getting away with bailing out institutions that the tax payers will pay for – billions of dollars for…

Meanwhile, no one appears to be reviewing the scandalous bonuses all the top management of the companies that have been bailed out got paid last year… anyway I digress….

Had AIG been properly downgraded requiring them to put up and in fact place forward the capital needed for the short term loans it regularly operated by, then the banks would have been required under normal rules to lend to AIG, but in present circumstances where the banks would probably have found it very hard to lend to AIG, and likely due to issues related to Frac Reserves – that is, the banks probably didn’t safely have enough spare money to loan to AIG - in other words, the whole issue of actually lending to AIG as normal probably could (and probably would) have thrown the banks into drawing on money to lend to AIG below or near their required liquidity ratio’s, (that is – below their Frac Reserve - that is 10% of the deposits made to the bank), thereby requiring the Federal Reserve to intervene with the banks for not holding enough money above their required Frac Reserve – that is, more than the 10% of what had been deposited to them – and this would likely have involved many US banks mind you… it would have involved many of the few remaining solid banks (which ones are those?) who normally conducted business with AIG - when things were cosy.

So all of this fundamental banking stuff may have been another reason why the Fed chose to get behind AIG… saving the big banks from institutional and media scrutiny were they called upon to make the required loans to AIG – in the process AIG has also been spared further scrutiny regarding it’s true state of affairs – a portion of which I understand was truly insolvent - why the Fed’s rescuing of AIG didn’t automatically trigger a ratings downgrade is a question nobody has bothered to ask since… just lost in the gloss of being ‘rescued’

I am of course only speculating until the truth is outed, yet since 1913-33 the fundamentals haven’t changed a dot – AIG were and are insolvent – make no mistake – and another things for sure, there are more fundamental and serious systemic issues (either technical or just plain insolvency) with the US banks that the Fed is working very hard to keep out of the news…. as history is written by the victors, so to the Fed is enviably, for now, in the position of writing dollar bills, so go figure how long they will keep writing the story until the house of cards falls down – for now, just so long as the world community deems this as OK, (though they are otherwise too busy dealing with their own economic implosions inherited from the US), the Fed will manage the controlled implosion of Wall Street – a Wall St that got too smart by half, but alas those who did have already pocketed their bonuses and left… so ste- up Mr and Mrs taxpayer to fill the financial void… and that means you to reader …

So for now we should be sure – we can likely expect a few more large banks to do things that banks don’t normally do, (go bust or merge for instance – where the latter is to more satisfactorily meet their Frac Reserve obligations – as we obviously have had compliance issues in the US of late – anyone notice?), and a whole lot more truth surfacing in due course, (oh thank you internet and insider banking bloggers!!) – however for the foreseeable future we should properly be sceptical and suspect that the whole (very well paid and very wealthy) top tier of the US financial industry is working in concert to keep as little said about how bad the fundamentals really are… that is… they have lent more than they can pay back to all depositors – and we the readers are the depositors.

This slide in the DOW ain't over folks.

(IMO)