friday frollics, page-19

Banking system 101 (to be sure)...

1. Relax lending standards;
2. Reduce interest rates
3. Encourage borrowing in exchange for property titles;
4. Inflate the money base;
5. Inflate asset prices,
6. Encourage further borrowing against mark to market of 'asset values'
7. Repeat steps 1 to 7 until market is saturated
8. When saturated then restrict lending standards
9. Increase interest rates
10. Contract the money base
11. Deflate asset prices
12. Liquidate 'distressed' borrowers, retain title to properties : )
13. Blame the borrower (minor cycle) or 'the economy' (major cycle)
14. Repeat steps 8 to 13 until deflation ceases to generate the feedstock for further liquidations.
15. Return to step 1 and repeat.


The irony of course is that the system is only rarely diagnosed by those who offer up their hard assets to feed it.

A news article today suggests that Aus may again be at the onset of step 8...

http://www.theage.com.au/business/westpac-tightens-mortgage-criteria-20100121-mo0g.html