Saturday, February 18, 2012

The Next Bank Crisis - Coming Soon

While it is true that US banks technically have little direct exposure to the financial mess in Europe, major US banks do have indirect exposure, which is the reason rating agencies announced recently that they are going to downgrade about 100 banks around the world, including many major institutions in the US.   Greece is going to default on its debt.  It is only a matter of time because the Germans will not continue to underwrite Greek social spending and entitlements.  And, with the riots on the streets in Greece, there is only so far Greek politicians can go related to implementing more austerity programs before it results in civil war.   As a result, Greece ultimately may remain in the Euro Zone; but with default looming, they will be forced to go back to their own currency, the drachma, giving up the EURO. 

Spain, Italy and Portugal, in particular, are also facing bankruptcy with National Debt above 125% of GDP, unsustainable entitlement programs, high taxes and stifling regulations that prevent economic growth.  Ireland is a little better off; but not much, since their bail out of $113 Billion is a debt load that 1.5 million working people in Ireland will have a hard time absorbing.  Times in Ireland are tough to say the least as they too have high taxes while at the same time property values have decreased by 40% or more. In order words, these countries cannot grow their way out of this mess.  

At some point, it is likely that all these countries may remain in the Euro Zone; but be forced to abandon the EURO.  There may be other countries, as well, currently part of the European Union that will have to go down this same road.  The European Union, as originally conceived with a common currency, for various countries borrowing to support their social welfare systems, has failed. 

There will ultimately be massive default on National Debt, which will be a killer for European Banks that hold these government bonds.   And, while generally US banks are not directly exposed to these losses, they are indirectly exposed because US banks have been buying and selling Credit Default Swaps (CDS) essentially insurance on the bonds held by European Banks.   If and when various countries in Europe default on their National Debt, which is inevitable, European banks will take a big hit. 

They will not have the money to cover these CDS insurance policies, which means they will default on monies owed to US banks.  CDS are held off the balance sheets of US banks so no one really knows how much exposure there is; but estimates for six major US banks related to Italy alone are as high as $200 Billion.  This exposure to European Debt losses is a time bomb waiting to explode on the American economy.

The only question is if the scenario described happens and we have a Banking Crisis, Part II, what will the US Federal Reserve and government do this time around.   It is probable that another massive US bank bail out will be necessary, whether politically feasible, or not.   This means that once again the American tax payer will be on the hook for these risky investments; but in this case to prop up European countries and banks.  

We are seeing the result of 100 years of Socialist Creep, around the world, as various countries, including the US, have borrowed trillions of dollars, Euro's, Yen etc to fund their entitlement programs and social welfare system as though the day of reckoning will never come.    The day of reckoning for Europe and by extension for the US is here.  However, our country is not far behind Greece as Socialist President Obama has proposed a budget that will add $11 Trillion to our current $16.2 Trillion in the next ten years.  Of course, the markets will never allow it because the US financial system will collapse long before.  

We are already paying $600 million a year in interest on our National Debt and that is with interest rates near zero.  When interest rates go up in the next few years, which absolutely will happen to attract investors,  we will see a  third of all tax revenues collected going to simply pay the interest on the debt.  This will require huge cuts to Defense and all major government programs, including Social Security and Medicare and for all not just the "rich".  

President Obama and his Socialist Pals in Congress, that have not enacted a budget in three years, are reckless and irresponsible as they continue to spend more than a Trillion dollars, every year since Obama was elected, that we simply don't have and with no end in sight.   These characters are bankrupting our country to buy elections and stay in power so that they can continue feeding at the trough.  Socialists understand these numbers requiring just 5th grade math to comprehend.   It is as though they intentionally want to cause the economic collapse of the United States to create a Socialist nation with a big government, command and control economy.  Obama is out to destroy free market capitalism in the name of "social justice".  

The only problem is that Socialism has never worked to create prosperity any place, any time it has been tried in the world.  Socialism has only led to misery, poverty, a lower standard of living for all, loss of freedom and even murder.   We are not going to let this happen.   We have to take back our country in 2012 and 2014 to prevent the bankruptcy of the United States.  Just look to Europe to see the end of our story if we don't act to make Obama, a clear and present danger to our nation and our freedom, a one term President.  We have to take back our country in 2012 and 2014 to preserve our freedom, our nation and way of life for the sake of our children and grandchildren.  We can do it.  We must do it to save our nation.   

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