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Will the banks stopped lending to sound businesses?


patslatt

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Apr 11, 2007
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An accountant of my acquaintance predicted months ago that continuing drops in property prices in 2009 would depress the value of bank mortgage assets so much that bank balance sheets would be wrecked to the point of insolvency risk.

He now says that recapitalising banks with new treasury share issues won't help maintain lending to Irish businesses. In the rapidly deteriorating economic environment,banks will selfishly prioritise their own survival by investing new funds in government bonds instead of lending to customers. They will be forced to do so as mortgages defaults force asset sales to support bank equity capital ratios,sales that will lead to a downward spiral in property values. At the same time, rising loan defaults will take from the cash the banks need to support existing levels of lending.

What to do? He says that the banks must be nationalised,an extraordinary opinion from a man with hard right wing views on economics.

When I suggested that in return for a government guarantee of a minimum 7 year rate of return on rights issue shares,the government could extract a promise from the banks to continue lending. He thinks it would be impossible to enforce. When I suggested that the government could set up independent committees throughout banks to rule on loan applications,he felt the committees wouldn't be close enough to customers to make good decisions. Still,the committees could decide what was a feasible level of lending at group level and then leave it up to bank officials to implement the lending targets.

Have P.ie readers seen evidence that banks have stopped lending to sound businesses?

As for the banking and financial crisis in Britain, this analyst argues that rapidly rising public sector liabilities could lead to hyperinflation Weimar Republic style http://seekingalpha.com/article/108421-is-bankrupt-britain-trending-towards-hyper-inflation?source=article_sb_picks
 
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Bobert

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It's hard to say what determines a sound business now.

One poster on here suggested Elan might be but I disagree.
 

drbob1972

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It's hard to say what determines a sound business now.
debt collectors and bailiff's are probably your best bet at present.
 

SPN

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It's hard to say what determines a sound business now.
There are no sound businesses right now.

Who in their right mind would lend to a retailer when the consumer isn't buying?

Who in their right mind would lend to a wholesaler when retailers are going tits up on a daily basis.

Who in their right mind would lend to an importer?

The cost of leasing CapeMax Bulk Carriers has dropped from $230,000/day in May to $6000/day in October. There is a global shortage of shipping containers at the moment because so many of them are sitting full at the docks in China awaiting letters of credit from Banks who are unwilling to lend to importers/wholesalers in the West.

Hundreds of Chinese factories are closing per week. Half their toy manufacturing capacity has already closed (+/-4000 factories).



The bit people seem to forget in all of this is that this is Global, it is caused by a massive credit bubble the scale of which has never been seen before, and there is nothing we can do to stop it.

We need to sit back and wait for it to collapse, and then invest in getting critical infrastructure (including certain manufacturing capability - pharmaceuticals, etc) back into operation/production.

Throwing our future taxes at the problem in a futile attempt to stop the unstoppable is a nonsense.

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Bobert

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If anyone had a bit of cash tucked away now is the time to buy things...
 

SPN

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If anyone had a bit of cash tucked away now is the time to buy things...
Not yet it isn't! ;)

Wait til you see the bargains to be had next Christmas!

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atlantic

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Recapitalising the banks won't work they will just hoard the cash.Let them fail and the strongest will survive,the same as is happening in business.Its tough I have gone through it in the last 12 months but the market told me it was time to get out and leave it to the stronger companies.
 

patslatt

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Keynesian stimulus urgent

There are no sound businesses right now.

Who in their right mind would lend to a retailer when the consumer isn't buying?

Who in their right mind would lend to a wholesaler when retailers are going tits up on a daily basis.

Who in their right mind would lend to an importer?

The cost of leasing CapeMax Bulk Carriers has dropped from $230,000/day in May to $6000/day in October. There is a global shortage of shipping containers at the moment because so many of them are sitting full at the docks in China awaiting letters of credit from Banks who are unwilling to lend to importers/wholesalers in the West.

Hundreds of Chinese factories are closing per week. Half their toy manufacturing capacity has already closed (+/-4000 factories).



The bit people seem to forget in all of this is that this is Global, it is caused by a massive credit bubble the scale of which has never been seen before, and there is nothing we can do to stop it.

We need to sit back and wait for it to collapse, and then invest in getting critical infrastructure (including certain manufacturing capability - pharmaceuticals, etc) back into operation/production.

Throwing our future taxes at the problem in a futile attempt to stop the unstoppable is a nonsense.

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A massive keynesian stimulus in infrastructure spending,with projects fast tracked in 6 months through Bord Pleanala, is necessary to prevent the risk of mass unemployment in the teens.

Given shambolic government deficits in 2009,funding will have to come primarily out of savings from maybe 50,000 plus public sector redundancies concentrated among the very overpaid €50,000 to 100,000 a year set,a form of income redistribution outside the tax system. Heavy tax increases on high incomes with tax rates as high as 60%, coupled with tax cuts for low to middle income earners, will also be needed for the duration of the borderline depression. This stimulus is necessary to support employment, property values and bank solvency.
 

Bobert

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drbob1972

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The cost of leasing CapeMax Bulk Carriers has dropped from $230,000/day in May to $6000/day in October.
you sure those figures are right ? 6K per day would not cover the fuel costs alone on those monsters, let alone any other costs, why would one rent it at a loss, better to park it up / moth ball it than lease out at a loss surely?
 

blucey

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Recapitalising the banks won't work they will just hoard the cash.Let them fail and the strongest will survive,the same as is happening in business.Its tough I have gone through it in the last 12 months but the market told me it was time to get out and leave it to the stronger companies.
And you were an essential part of a modern capitalist economy were you?
 

Squire Allworthy

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It probably costs a lot to maintain. Many large pieces of machinery are easier to maintain when working.

The Banks started reducing lending to business long ago. In fact it would seem that some of then are now taking their bail out money (from taxpayers) and instead of lending are buying treasuries and are getting a safe return on what was given to them. Who are the fools?
 

SPN

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Recapitalising the banks won't work they will just hoard the cash.
It now seems that many of the Banks may have massive exposure to Credit Default Swap related bets.

If that happens the money we pump in will be sucked back out to pay off these bets to the Hedge Funds.

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SPN

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you sure those figures are right ? 6K per day would not cover the fuel costs alone on those monsters, let alone any other costs, why would one rent it at a loss, better to park it up / moth ball it than lease out at a loss surely?
I think the running cost is about $5,500 per day (fuel and crew), but I'm sure that varies.

I did a Google to get a reference and found this article dated today.

Shipping Continues Its Downward Plungehttp://seekingalpha.com/article/108393-shipping-continues-its-downward-plunge

Capesize vessels weigh from 175,000 tons to 400,000 tons and count as some of the largest craft in the world. They typically carry raw materials such as iron ore, steel, coal and other raw commodities. Where you used to pay up to $230,000 per day to rent one, now you can have one for a measly $2800 per day. Lloyds even reported Thursday that one Capesize vessel was going for $1000 per day. These levels of payment are crippling the shipping Industry and leading to canceled orders with shipyards where it is cheaper to let the shipbuilder keep the deposit.

Even more interstingly, the article contains this gem.

Exposure to derivatives and CDSs are significantly larger than they were in the same period in 2007, when the system was in a better state and thus the system has started to fall off a precipice with no sign of the bottom in sight. Once fallen, there is no stopping it unless the toxic financial bundles are purged from the system. The lack of will to do this is accelerating the systemic failure. There is not enough money on the planet to cover the derivatives market pure and simple.
The triggering of the CDS market, and the transfer of immense amounts of wealth from the taxpayer to the Hedge Funds is what is going to cripple the Global Economy, not some overvalued development land in Ireland.

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jerryp

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It now seems that many of the Banks may have massive exposure to Credit Default Swap related bets.

If that happens the money we pump in will be sucked back out to pay off these bets to the Hedge Funds.

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That is all the more reason that the call for nationalisation by the ICTU makes sense. It's no use having the government asking the banks how much they want and giving it to them. Money they get should be designed to generate economic activity, not to protect share prices, etc. I'd be certain there would be enough around to act on behalf of the government / people to ensure that monies given are productively spent.
 

SPN

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There are sales before Christmas this year...
.... and they are nothing compared to what we are going to see next year.

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SPN

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That is all the more reason that the call for nationalisation by the ICTU makes sense. It's no use having the government asking the banks how much they want and giving it to them. Money they get should be designed to generate economic activity, not to protect share prices, etc. I'd be certain there would be enough around to act on behalf of the government / people to ensure that monies given are productively spent.
It is pointless to try and generate economic activity at the beginning of a deflationary period. All the money would be wasted buying over valued goods and services. We should keep our powder dry and conserve our resources until the time is right.


Nationalising the Banks is a fools errand because they have too much toxic bets on their Balance Sheets.

We need to set up new Mutual Banks with clean Balance Sheets, and transfer the tangible assets (deposits, collateral, mortgages on primary residences, etc) from the old Banks to the new Banks.

The old Banks can then go into receivership which will allow the market to properly value whatever else they have on their Balance Sheets, and the gamblers can share whatever is left amongst themselves.

Ctrl-Alt-Del

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Squire Allworthy

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It is pointless to try and generate economic activity at the beginning of a deflationary period. All the money would be wasted buying over valued goods and services. We should keep our powder dry and conserve our resources until the time is right.


Nationalising the Banks is a fools errand because they have too much toxic bets on their Balance Sheets.

We need to set up new Mutual Banks with clean Balance Sheets, and transfer the tangible assets (deposits, collateral, mortgages on primary residences, etc) from the old Banks to the new Banks.

The old Banks can then go into receivership which will allow the market to properly value whatever else they have on their Balance Sheets, and the gamblers can share whatever is left amongst themselves.

Ctrl-Alt-Del

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Totally agree. We are fools for guaranteeing the unknown.
 

SPN

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Totally agree. We are fools for guaranteeing the unknown.
Not quite.

If we hadn't put the guarantee in place there wouldn't be food in the Supermarkets today. The Irish Banking system was within hours of being taken out.

It was the right strategy at the time and completely blindsided the Hedge Funds.


What we do next is what will ultimately define whether we stay afloat or go down with the rest.

We need to separate the tangible assets from the toxic gambling slips and make sure the taxpayer doesn't become liable for the bets.

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