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Bank Recap - Where We Stand


Wells Fargo's surprise announcement today of record profits is a welcome sign that the Obama administration's strategy for repairing our financial institutions has a strong chance for success if we can avert systemic meltdown over the next 12 months.

The Fed is providing cheap money to banks to fatten there operating profits. Mark to market rules are being eased which will allow banks to push losses into the future where they may, in fact be less. As mentioned in the article, there are still a mountain of losses to be absorbed and many banks will fail. 

The strategy is to stall the crisis until banks can grow operating profits sufficiently to generate capital for the balance sheet. A very similar approach was used in the early 80's with the foreign debt crisis. Banks were given time to heal themselves. 

In the mean time, the government is prepared to soak up the toxic assets on bank balance sheets thus freeing the bank's capital for more productive uses.

With the Damocles Sword of derivatives hanging over the market, where one bankruptcy could rupture the system and bring down the entire network, it is questionable whether the old system can be saved. 

The US government is flooding the market with money and debasing the currency in an effort to kick start the economy.

The strategy is to give the economy an electro shock jolt to revive it. 

Inflation can be addressed later and would be a symptom of recovery, therefore, a sign of hope, a good problem to have versus having an economy with a heart that isn't beating and blood that isn't flowing.

Once we establish a more rational, sane regulatory structure for the derivatives market, we will begin to remove the threat of this crisis repeating itself in the future. The return of Glass Steagal in some fashion will also be necessary so that bankers get out of promotion and sales, and go back to banking.

In the future, look for a strong, bull market recovery that will be fueled by inflation. Commodities, materials, precious metals, oil, and agriculture will soar as will big tech companies that are adept at passing through price increases. 

I don't know when that future starts, of course but the cancellation of many mining and exploration projects during this downturn means that when the economy starts to recover, demand will outstrip supply for metals, materials, and oil and their prices will skyrocket accordingly.

The treasury department and the Fed are "all in" now and throwing everything they have at this crisis. The big question still unresolved is whether even the mighty US can stand up to the losses created by this financial disaster. 

I'm betting we make it to the other side but not without another year of shock and awe.