Yes, the banks are in bad shape, but not that bad…
First, the article, followed by our comments.
This is a spectacularly good piece of information design, from Tyler at Zero Hedge. It repays a lot of looking at, and manages to encapsulate both the scale of the US banking system and the scale of the solutions which have been announced or implemented to date. Click to enlarge:
On the asset side of the US banking system’s balance sheet, the $4.8 trillion in mortgages is a problem — but there’s another $3.1 trillion in bank loans and consumer credit which is looking increasingly shaky. Against that there’s less than $1 trillion in common stock, supporting over $12 trillion in liabilities.
Meanwhile, Tyler has neatly lined up the government’s support programs along with the relevant parts of the right-hand side of the banking system’s balance sheet. Add them all up, and they come to just over $9 trillion, or 67% of the banking system’s total assets. It’s an absolutely astonishing amount of support, and it brings home the scale of the problem facing the government.
In a nutshell, the problem is the classic one: on the left-hand side nothing is right, and on the right-hand side nothing is left, at least absent government intervention. Says Tyler:
As the government has the best information about the true sad state of affairs, it is likely that as more and more information about the weakness of the financial system comes to light, more of these support guarantees will become utilized to their full extent. This also means that the asset side of the balance sheet is potentially “inflated” by almost 75% and the net result could be the most dramatic collapse in a banking system’s assets in recorded history as over $8 trillion in “assets” are reevaluated.
This doesn’t need to be probable to be terrifying: it just needs to be possible. And Tyler’s point is that the government has put all of these programs in place precisely because it’s possible. So: fear is entirely rational here.
So far the article from a well known blogger (Felix Salmon, who got the info from ‘Tyler Durden’, another blogger). However, he indicates that all of the outstanding loans ($8+ Trillion!) are potential problems. That really is hard to believe, actually, let us rephrase that, this is nonsense.
This assumes that potentially, nobody pays anything (interest and principle) on their consumer credit or mortgage. We really cannot perceive any situation where that is near likely to happen.
Yes, there are numerous people behind with their monthly payments, and others who have stopped paying altogether, but to assume total default, well, how is that going to happen?
So in the end, this amounts to scaremongering. Which is exactly what we don’t need right now.