Yes, you read that correctly. More bailouts are coming our way ...
As we previously discussed in "Jobless Claims and the New Great Depression," the global banking system has to find a way to refinance over $5 trillion in short-term debt, "a massive rollover that poses threats to financial stability and growth."
But with fear already permeating the markets, banks are finding it increasingly difficult to raise money. So assuming a major sovereign debt crisis doesn't happen in the next few years, taxpayers will be put on the hook yet again, for even more.
Crisis Awaits World’s Banks as Trillions Come Due
[T]he trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.
The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.
Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.
“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland ... “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”
Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements.
How banks will come up with the money is an open question.
In fact, they're already expecting more bailouts!
Stephen G. Cecchetti, head of the monetary and economic department at [the Bank for International Settlements], called the refinancing issue “a vulnerability and something to be watched.” But, he added, in a telephone interview, "I am confident that national authorities will take the necessary actions so that it isn’t a problem."
See also: The risks of forcing banks off welfare.
Credit markets will get squeezed further, forcing interest rates sharply higher, and the Federal Reserve will respond with more "quantitative easing" (printing more money). Meaning they'll eat away at your wages, pensions, and savings even more.
They won't be able to print enough money though, not without guaranteeing hyperinflation. So they'll turn to Congress, who will once again warn of pending doom before they pass yet another bailout. But of course bailouts are just another scheme to print money, so not only will they continue eating your wages, pensions, and savings away, but will exasperate the possibility for hyperinflation too! As Ludwig von Mises wrote:
The government and the journalists who were writing for the government told us about this "deficit spending." It was wonderful! It was considered something that would improve conditions in the whole country. But if you translate this into more common language, the language of the uneducated, then you would say "printed money."
Now what does this mean? Deficits! This means that the government spends more than it collects in taxes and in borrowing from the people; it means government spending for all those purposes for which the government wants to spend. This means inflation, pushing more money into the market; it doesn't matter for what purpose. And that means reducing the purchasing power of each monetary unit. Instead of collecting the money that the government wanted to spend, the government fabricated the money. Printing money is the easiest thing. Every government is clever enough to do it.
See also: Everything You Need to Know About Stimulus, Inflation, and the Federal Reserve Bank System.
As pressure on state and municipal bonds continues to climb, they'll ultimately get bailed out too.
The Bank-Insurance-Municipal Daisy Chain
Bank preferred debt, I argued on March 1, 2009, would not be allowed to go under after the fashion of Fannie (FNM) and Freddie (FRE) preferred, because shutting off payment on bank preferreds would ruin the insurance industry.
The same applies with a vengeance to the banks and municipal debt. As Bloomberg reported yesterday, the banking system owns well over $200 billion in municipal bonds ...
If municipal debt actually defaulted, the capital position of the banking system would be impacted, bank preferred debt might stop paying, and the holders of bank preferred debt – starting with the insurers –would be in serious trouble. The $800 billion bailout package for Europe’s PIIGS (Portugal, Ireland, Italy, Greece, Spain) in May was in fact a bailout for the banking system, which holds hundreds of billions of dollars worth of such debt.
[T]he fact is that the federal government can’t let major municipal debtors (at the level of states, for example) go under without also bringing down the banking system and everything else.
If it goes, it all will go together. That’s why munis ultimately will be bailed out. A Democratic administration whose core constituency is public employee unions will do everything in its power to keep them happy (and a Republican Congress, which we likely will have in 2011, may frustrate this). But ultimately it’s a matter of survival.
The question now becomes, will a Republican Congress actually put the breaks on more bailouts? They sure didn't last time.
Even after the coming elections this November, it's important to note that the neoconservatives will continue to hold a majority in the Republican Party. This is important too, because just like the left, neoconservatives argue that "deficits don't matter," so they'll be as happy as Democrats to bailout their friends once again.
U.S. Banks Risk `Untold Problem' as Muni Debt Swells
The 9.5 percent U.S. unemployment rate and slump in property prices have slashed local governments’ ability to pay bills. Billionaire investor Warren Buffett ... predicted a “terrible problem” for municipal bonds. Buffett has said a U.S. state facing default may need a federal rescue.
U.S. states are likely to face $140 billion in cumulative budget gaps in the coming year, according to the Center on Budget and Policy Priorities. Last year, 187 tax-exempt issuers defaulted on $6.4 billion of securities, the most since 1992 ...
“It’s a market where it’s clear that the underlying fundamentals are lousy,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., a New York- based brokerage. “People can say fundamentals don’t matter but I’ve been doing this for 32 years. They do.”
Bottom-line: The crisis created by the Federal Reserve with the help of Congress, is far from over. In fact, it has just begun. Taxpayers will be forced to shoulder more bank losses, tax revenues will keep falling, and layoffs will increase. Tax revenues will then fall further, until state and local governments are pushed into default, leading to even more layoffs. Of course fewer people working means mortgage defaults will climb, resulting in further losses in tax revenues. The bailouts won't create jobs either, but drive each one of us deeper in debt instead ... It's a cycle of economic death we'll be stuck in for years.
There's simply no way out of this. Judging by the last few administrations, they're not about to let the banks take the losses they deserve, so they'll saddle taxpayers with those losses instead. Losses which will be piled on top of their lost jobs, pensions, retirement accounts, and previous bailout debt ...
Don't worry though, the politicians and politically-connected will get through it all just fine. It's the rest of us suckers who will suffer. Our penance for trusting fools.
