Banking Crisis

It is now known that in October 2008, we were within minutes of a total collapse of the UK Banking system. (Ref 1) Even up until the very eve of the crisis, bankers and politicians assured us that the many risks to the financial industry were contained. Clearly, they were not. Only 3 dozen economists correctly predicted the 2008 global financial crisis, out of a profession of 20,000 members. Not one of the World politicians and Central Bankers saw this crisis coming ( but all of them claim to know the remedy).

Current situation with Banking System

Information about the UK banking system is not readily available, but it is fair to assume that UK banks are in a similar fragile state to those in the USA.

Combined, the monetary and fiscal stimulus engineered by the US Federal Reserve and the Treasury Department represents an estimated 30 percent of the US’s gross domestic product. That’s three times more than during the Great Depression. And that’s ten times more than that in the average postwar recession.

 These are up to date graphs from the Federal Reserve. The grey areas are previous recessions.  

Graph 1 shows that US banks are now hoarding over $1trillion cash, having risen $200bn over the last 2 months. Note that nothing like this has happened in previous recessions, going back to the 1960's.The Banks are not lending and until they lend, there will be no recovery in the USA.

Graph 2 shows that the M1 money multiplier in the USA is still falling.  It is less than 1. Historically this has never happened before. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.81. (ref 4)

Graph 3 shows the median duration of unemployment figures is continuing to rise, in other words they are staying unemployed for longer, note previous recessions

Graph 4 shows % change from year ago of Bank credit of all US commercial banks

Graph  5 shows that the % change from year ago of mortgage lending at commercial banks, is at it's lowest since records began 60 years ago

The situation is getting worse.  The forecasts and announcements of the end of the crisis are premature. 

 

Until the Banking system starts to show some improvement and trending towards it's normal state, systemic risk of the financial system is real and  cannot be ignored.

 

Mike Haywood

Recommended Reading

1          U.K. Faced ‘Bank Runs, Riots’ as RBS and HBOS Neared Collapse    http://www.bloomberg.com/apps/news?pid=20601087&sid=aMfETcYI2t7Y

2          Adair Turner, Chairman of UK Financial Services Authority, British Embassy speech,  Paris, 30 November 2009    
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/1130_at.shtml

3          IMF Global Financial Stability report    http://www.imf.org/external/pubs/ft/gfsr/2009/01/pdf/text.pdf

4          M1 Money Multiplier below 1   http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html