thanks for your comments as always. I agree about the Heloc and Option-ARM misery. Some who lose their homes you can't help but feel for. What was their crime but to be too ready to believe those who told them it was fine to take on more debt. You'd be a sucker not too. Others I feel little sympathy for. They wanted to ride the gravy train and didn't care if it was socially good or not. They wanted theirs and that was all. I have seen pages of examples of scammers and specualtors using fake buyers to get property after property. I just can't find in it me to weep for them.

I think you are right the drowing tide of reposessions will rise . But this is less about staving off reposessions for ordinary people and more about banks faacing another round of losses coming right up. Is it commerical losses at the regionals or Heloc and ARM's at the majors? I don't know.

But this autumn is when I think we'll start to get a little more clarity.

But then again Rich I have been wrong so many times over the last 18m months. This hovering, stuttering, not-quite-a-rally, but not quite a headline-grabbing-drop either, has gone on far longer than I thought it could. Which is a reminder that I am an outsider and still a learner.

I have to go out for most of the day now. Back much later. Bye.

I take it you are referring to the lead story about the FOMC decision?

They are saying it's not quite QE, QE-lite as you suggest, because they are simply recyling money that was already in the system in previously purchased securities. So a mortgage backed security bought from one of the big banks or from one of the agencies (mainly Fannie or freddie), matures but instead of withdrawing the cash the FED will now inject it back into cirulation by buying up another wilting asset.

So is this QE or not? Or more importanty is it inflationary or not. They aren't exactly thesame question are they? I'm guessing that's part of what is bothering you.

The Fed is right its not newly printed up money. So it is QE-lite in that repect.

It is, however, a clearU-turn in policy which is an unambiguous signal that all the 'we're in recovery' talk was as premature and silly as we thought. This is as clear an admission of double dip as we are giong to get from the Fed. For the moment at least.

OK so it's not new money. They are not increasing the total amount of all money printed. BUT by putting it back into circuation they are inflating the amount of money in actual circulation. Which is more germain to inflation fears than the total amount in existence.

And it's A LOT. $150 billion "or more" they said. This isn't just what happened to mature this week is it? $150 billion is cash accumulated in an account. Which means it is a war chest they have been saving specifically for this sort of spending. They might need more, though $150 billion is quite a bail out is it not? let's not get too blase about out hundred billions.

Putting $150 billion back into the pot is inflationary and more important it is a bail-out. Had they taken this money OUT of circulation they would have reduced the Fed's bloated balance sheet and lessened thei liabilities. They could have paid it back to the Treasury who could have made it available to bail out local and state government's to help them NOT have to close so many scholls or fire so many teachers for AMercian children. BUT NO.

Instead they are going to put that tax-payer cash back on the hook for the bankers.

My guess is it will be used to buy up commercial property securities to help the regional banks and the commercial sector which is reaching critical now. OR, if the big banks have shouted louder than the commercial/regional lobby, then it wil be used to catch the rain of knives falling from Option-ARM re-sets and HELOCS which do finally seem to be doing what we all thought they would do a year ago. Low rates put it off this long but can't hold it off forever.

That's my take of it Mr Eirik. Hope it helps a little.

I'm with two minds regarding Option ARMs and HELOCs. On one hand I would like them to explode, because this would send a very loud warning shot over the heads of our indecisive leaders. On the other hand, what happens to thousands of American families when their lines of credit are frozen?

Could Option ARMs fail in a spectacular fashion? The process may be more pernicious, with banks steadily increasing the number of repossessions.

Thank you.

Bail outs within five years? I think five months is more like it. At least if you count a major bout of fiscal incontinence (QE) as a bail out.

I think QE is fast approaching here and the US. From the new school year to Spending round here in the Uk in Octboer and teh Mid term elections in the US in Novermber will be the crunch time.

A real actual bail-out of bank directly is also becoming more likely. US Commercial property is killing the regional banks faster and faster and getting to a critical juncture. SO too for the Option ARM's and Helocs at the major banks. These latter have only lasted this long because of the very low rates. But even low rates can't stop the reset and recast for ever. So many of those properties are so far in negative equity that they couldn't re-set even if the debtor wanted to .

We have been talking abou tthese debts for 18 months being proved wrong again and agin about when they would blow up. Maybe there is yet another trick to stop them exploding. But if there is a trick it will sure as hell cost money. So it's either bail them out or let them explode and then bail them out.

Me? I live on optimism! I'm the good vibe man.

All signs now seem to pointing towards another round of bailouts within the next five years. How will we manage this? How will our governments fund it? More cuts to services? Further erosion of the social safety net? Probably. What with the fetid bunch of overtly corrupt and self-interested blackguards that make up our political class.
Over the last two generations we've allowed our elected representatives to subjugate our interests time and time again. Subjugation not just to the moguls of finance but to those of energy and arms as well. Your excellent analyses make the former more clear now than ever. The affronts to human dignity in the gulf of Mexico, Iraq and Afghanistan are evidence of the latter.
It is sad that it will take suffering on a grand scale once again to kindle the fires of rebellion against those who wield power by virtue of obscene wealth. It is sad that we have to reach a nadir of justice once again before those who are capable will be spurred into action. But you, Golem, and those like you who speak out for justice and fairness, who question that which is regarded as absolute truth, are facilitating the emergence of new generation of leaders. A new class of informed citizens who will break down the tenets of wisdom, the rules of political life handed down from our 'betters'; who will spread these principles among the people until the tipping point is reached and the people will stand for no more.
I have to believe this because the alternative is despair.

Keep up the good work.

I am sure you are right that for many it was just as you describe. A job at which some were very good and others unlucky. Just the pressure to do better than the next bloke would be enough to drive the whole thing.

I suppose all I am arguing is that there were also others, perhaps those further up, who should have and perhaps did see a larger picture and knew the risks, but did nothing to reign it in.

I think some of them were greedy. For wealth or more likely power.

I agree the machine will wreak even without greed. But I am not inclined to be so charitable as to think them all reasonable and just men 'just doing their job'.

thesleeperawakes,

Simple questoins to ask hellish to answer. For me at least.

First when you say they can just conjure a loan out of thin air and borrow to meet capital requirements, am I right in thinking you are ndescribing how banks will borrow on the interbank market in order to extend a loan (the wholesale funding model)?

If that is what you mean then you are correct. Although in the whole pool of loans the bank will likely have also loaned out against all depositis as well.

So if the loan goes bad, as you say, for a loan based on wholesale funding, the loss will be on that borrowing. The main looser will indeed be the person holding the security.

Does that mean the sysytem will survive while those holding the most securities are forced out? Difficult to answer.

If what you are getting at is did Paulson and the bankers exagerate the systemic danger in order to balckmail congress and the EU, then I tend to agree. But it's not clear cut, I don't think.

Banking would have survived. Indivual banks would have survived. New banks could have been cpitalized and the ATMs would have still run. Althougth government set up banks may have had to 'seize' large parts of the system from the hands of the dead banks. Visa would have agreed after making a few noises.

BUT there would have been a systemic crash in the sense I described. The promise which animates the whole shadow/securitizing system would have been destroyed by the sheer volume of non-exchangeable securities and the number of institutions holding them. So many banks and finds would have gone into cardiac arrest than everyone holding securitized paper would have suffered. Even paper that wasa actually performing.

In that sense the bankers were correct there would have been a systemic seizure. BUT both the banking system and banks and AT's and people's savings would have survived.

Wealth would, however, have been massively wiped away from the wealthiest.

Make no mistake it would have been an epic, history changing moment. BUT WE WOULD HAVE SURVIVED.

They claimed the disaster would have been such that the rule of law, freedom and democracy would have been at risk. Anarchy would overtake us all is what they argued. I think they were giving voice to their frears for their own wealth and power and dressing it up in terms designed to frighten the cowards who lead us.

I argue that all those things they say would have been at risk, have been mortally damaged but by the actions taken to 'save' the financial system.

The arguments and fright tactics, will, I think, be heard again before two years are out.

As IanG has already pointed out, it is not possible for 'business as usual' to continue much longer. Once interest rates rise, even a small amount, then there will be a deluge of defaults that might be enough to force the old system to change.

Would we survive without a shadow banking system? In the age of globalisation is international trade still possible without it?
Well, I have Adam Smith's excellent book. Perhaps I ought to read it.

Some of these guys were just trained and zoned in to search out the way to work the options available to them and some just got lucky.

A few questions if I may (probably stupid ones but ones which I cannot quite make sense of).

You have described what happens to loans etc once it enters the great securitization/leverage machine but can I take a step back to the loans themselves. As I understand it banks can create loans out of thin air and then borrow to ensure that they comply with their minimum core capital ratios (is this correct?) If so, then the only loss they would suffer if a loan goes bad is from the amount they have borrowed. Therefore, does this mean that the system will never truly collapse as it just means that periodically the person left holding the parcel (due to securitization/leverage) will be forced out of the game (like Lehman was), deleveraging will occur before it all starts again?

If that is the case then by blackmailing governments for bail outs etc are they just trying to stop as many of them going under instead of being worried that the whole system is under threat?