The Banks – Boomz or Bombz?

“My impression of the U.S. banking system is that it is quietly going insolvent in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps.” ~ John Hussman

Yup, we’re talking about my biggest bane again … banks.

LOOKING BACK …

Four years ago when I had just started teaching, I told my students that the financial capital of the world would likely see a change. Where it would go was debatable but what was obvious was that I was not comfortable with the way financial institutions were “running the business” into the ground with their questionable practices. My senior students will remember that I said that the financial system in the U.S. was on the brink of a major overhaul and that the financial capital of the world would likely see a change if things got out of hand or if leadership in the U.S. did not “do the right thing“.

At that time, doing the right thing was not to repeat the same mistake they made in 1974 with interest rates and instead, take the other direction and hike it above 5.25%. I also mentioned that if banks continued the way they did, we would see some sort of capitulation in the financial sector.

TODAY …

Radical as it sounded then, today, in retrospect, they were visionary … or maybe it was that obvious that a small time trader like me could have seen it coming. So if it was that obvious, why didn’t the banks or relevant authorities not take the appropriate action to avoid the resultant meltdown?

The answer is a tricky one and has little to do with banking or finance. It has to do with politics, influence and the rich covering their butts with as much money as they can get, even at the expense of the little guy on Main Street. Yes, they would go on to take tax-payers’ monies to line their personal wallets first and then spare a tiny thought for the companies they work for and the people whose money they represent … or were supposed to represent.

To be fair, not all individuals in the finance industry are money grubbers but given all that has happened, it’s hard to know who to trust anymore. But when I meet friends who have run away from such institutions because they couldn’t stand the insomnia from the guilt and the pain of seeing their clients get burned, when they get so useless to do anything for the people who trusted them with their money and homes, when they get angry at the nonchalance of their bosses’ attitudes toward the little guys … I know that I have the right to say, “I told you so.

CHANGE

“It took a lot of blood, sweat and tears to get to where we are today, but we have just begun. Today we begin in earnest the work of making sure that the world we leave our children is just a little bit better than the one we inhabit today.” ~ Barack Obama

Gone are the days that America did things that made America great like build quality products, give quality service and most significantly, police the world for peace and stability.

America was once about working to produce innovative and quality products. Then Americans got greedy and demanded more pay. They even got a mafia-styled group of people to make these demands for them – Unions – to which if demands were not met, the workers revolted. In any other society, this would be deemed as criminal … but not in America. This sort of behavior was condoned as long as it didn’t turn violent (and it often did). So the workers got their way and soon priced themselves out of the labor market. Corporate America found cheaper and more obedient labor in Asia. Employment dipped and continues to tank today. So America blames Asia for taking away their jobs. They blame Asia for “stealing” their ideas and mass producing it when they could have and should have done it themselves but were too lazy and greedy to do so in the first place.

Today, America is all about the bottom line and making money without having to produce anything. In fact, America has become so smart about making money out of nothing that they now make money out of bad debts and death.

Service does not have the same pride of place anymore because a job is a job as long as you can hang on to it. Why would anyone want to put in more than a day’s pay when there is no way of knowing if you’ll have that job tomorrow or if that company is still going to be around next week? Like Japan before it, America is forgetting to nurture small and medium size businesses for tomorrow’s big enterprises. Instead, like Japan, everything is about being big … so big that they become “too big to fail”. So arrogance replaces pride of service and takes on a “take it or leave it” attitude. SMEs always take pride in good service and quality products because those are qualities that eventually turns small businesses into conglomerates – history has always proven this practice right – and breeds companies like AAPL, GOOG, CAT, GE and many more.

The once revered peace-keepers are now busy invading and colonializing. The once staunch defenders of freedom are now forcing their 200 year old ideologies (no matter how flawed) down the throats of 4,000 year old civilizations. America is best when in America where guns are the norm and paranoia is a 200 year old culture. Exporting this culture is an even worse practice than exporting their debt and unemployment (the massive outsourcing of America’s production has also led to massive unemployment for countries that produced American products). In a sense, America today is what Britain was about 90 years ago. And look what happened to them.

“The true test of the American ideal is whether we’re able to recognize our failings and then rise together to meet the challenges of our time. Whether we allow ourselves to be shaped by events and history, or whether we act to shape them.”
~ Barack Obama, Jun. 4, 2005

Strange how things look with retrospect. America is indeed a country voting for the lesser of two evils. “Change”? … Yes they can … and they have … they have changed the world for a far worse place.

MOVING FORWARD …

Four years ago, I mentioned at my tutorials, public seminars and in print, that Telcos will be the financial institutions of the future. Credit cards as we know them today will evolve as Telcos will rule the financial markets. As it is, today, we do a lot of financial transactions over the internet and the trend is moving toward the cell-phone. Our phone bills no longer only bear costs of communicating but have e-transactions and expenses that are not related to mere communication. As the world turns its back on credit, corporations will be looking for a more reliable way to collect their payments and Telcos will be the answer.

On a side note, Telcos will also dominate media and advertising not too long from now.

This will be a breath of fresh air as the financial power shifts from banks to Telcos. But how long before the Telcos get consumed by greed and repeat the mistakes made by the banks? It would seem that it has already started judging by the way one Telco here in Singapore outbid another without (it would seem) a solid plan to recoup that obscene amount of money. In my opinion, the loser of the bid was wise to walk away from what was an unaffordable investment – the mark of a good trader who knows when to cut losses quickly and move on – and keep its books sane and control debt.

BUT …

For now, we have little choice but to tolerate the influence and power that banks continue to wield. Even as the government discourages property speculation, the banks step right up to the plate (literally) and make their presence known with value added services so that they retain their market share in lieu of the next great plan to beat the system for the next line of credit.

It was in part due to the easy credit schemes that sent property prices soaring to 2007 highs in recent months. We know this because ever since the government stepped in to curb it, prices have not soared any higher.

Differed Payment Scheme subscribers may not know the kind of bomb they have created yet;

When it comes time for the huge part of the payment to be made, if property prices tank below their bought price, many of these subscribers (mainly the Flippers) will default on their purchases and walk away from paying that next big installment. By then, we will have a mortgage default situation that will be no different from that of the U.S.

Property prices will falter like mad, banks will end up holding a major portion of the inventory of existing homes as demand drops below supply. Owners of homes will see their property value decline and question the logic of paying a loan for a house whose value is lower than the loan. Defaults mount further. In the meantime, banks maintain an unreasonable interest rate to keep their interests afloat.

The government steps in to control the rot. They either buy up existing inventory to lessen the supply hoping to drive up demand or they exercise the properties they own prematurely to stabilize the faltering home prices. They may even pump in monetary incentives for home owners to own more than one property at the prevailing “attractive” rates.

Remember that if property slumps, so does the economy.

As the economy slumps, owners of cars with 100% loans (again thanks to the institutions) will find it hard to sell their vehicles because they can’t afford to top up the loan or pay up the interest before they can sell that white elephant to either recoup some cash or to get rid of a growing debt.

Liquidity becomes an issue. And because our currency is priced so high against most other currencies now, the fall from those heights will be traumatic. Salaries will dip or remain unchanged while living costs go up to “balance” a faltering economy. The pain continues.

Hypothetical, of course … but it never hurt to be prepared for the worst. I have said many times before that the current credit crisis will go on for a long, long time because the underlying systemic problems are deep and thorough. It would take a war or a catastrophe of biblical proportions to wipe this slate clean so that everyone around the world can start again. Pumping money into the problem is not solving the problem – its just delaying the inevitable – because Nature will never be denied its natural course.

So why aren’t we doing the right thing? It’s because those in power are the rich ones and stand to lose the most as a result of admitting that they are well and truly beaten by their own system of mis-management. And just who are amongst the richest and most influential?

No prizes for guessing right.

Share

If you enjoyed this post, please consider to visit Pattern Trader Tools, leave a comment or subscribe to the feed and get future articles delivered to your feed reader.

Comments

No comments yet.

Sorry, the comment form is closed at this time.