To Save the Banking Sector in Iceland Will Cost $500,000 Per Citizen

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“What’s the capital of Iceland?”

“Oh…about $6.50.”

That’s the joke that is making its way around London this morning.

Iceland has melted down. Now, the government has pledged to save the banking sector – but at a cost of nearly $500,000 per citizen! In Europe, the cost so far is estimated at about $7,000 per citizen. But experts insist that much of that money – loaned to the banks – will come back to the government.

And in America? Who knows…?

The subject is on every pair of lips. It has replaced the weather as the focus of casual conversation.

“How ’bout what is going on at the banks,” say farmers to one another.

And on the radio, talk shows are alive with recriminations, conspiracies and finger pointing. The man on the street is like a palm tree in a hurricane, wondering what makes the wind blow so hard.

On Monday, the wind shifted. The Dow shot up – along with the rest of the world’s stock markets. People looked up and saw sunshine. But was it a genuine end to the storm…or just the eye of the hurricane that was passing over?

Then, yesterday, the clouds came back. The feds announced that they had to force an evacuation. Capitalism would have to leave town – at least temporarily. They partly nationalized nine U.S. banks.

The Financial Times recorded the scene at the Treasury Department as they told the world:

“America is a strong nation. We are a confident and optimistic people,” declared Hank Paulson, Treasury secretary.

“Our confidence is born out of our long history of meeting every challenge we face.” But then reality reared its ugly head. “There is a lack of confidence in our financial system…it poses an enormous threat to our economy. Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other.”

So was America confident or terrified? Apparently, it was confident that it could stop being terrified – but only if the government came to the rescue.

Deputy undertaker Ben Bernanke, Federal Reserve chairman, stared grimly into space; Sheila Bair, head of the Federal Deposit Insurance Corporation, nodded occasionally. Tim Geithner, president of the New York Fed, stood with both hands in his pockets, looking concerned.

Mr. Bernanke’s turn came next, promising to do whatever it took to save the nation from disaster while letting slip that even yesterday’s giant intervention might not be enough. Then up strode Ms. Bair, her head barely visible above the podium Mr. Paulson had towered over, to detail the “extraordinary steps” the government was taking to save its banks.

Saving the economy would require “a sustained and coordinated effort by government authorities”. People may have lost faith in the private sector but not the power of federal authorities to rescue them. “Above all else, there must be no doubt in our government.”

Ronald Reagan must be turning in his grave, the FT concluded.

But the deed was done with hardly a peep of complaint. Those few who were inclined to peep were pushed aside and ignore.

The Dow fell 76 points on Tuesday – a bad sign. Usually, following such a bad week, you’d expect the dead cat to bounce for several days. This one had a good bounce on Monday and then lay as still and as silent as a tax collector’s tomb.

This is an ’emergency;’ everybody says so. All very well to take the high road when the weather is fine. But when storms come, people look for shelter wherever they can find it.

How bad will the storm get? This from Nouriel Roubini, Professor of Economics at the NYU Stern School of Business:

“The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

“At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

“At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

“A vicious circle of deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway.”

And, looking in our old book, Financial Reckoning Day, written with Addison Wiggin, we find this remarkable forecast:

“If the US were to repeat the Japanese experience, stocks would be expected to return to their 1995 trend line, with the Dow below 4,000 in the year 2012, at the very moment when America’s baby boomers will most need their money.”

Get out your galoshes, dear reader…

*** We’re rushing to the airport – on our way to the Frankfurt Book Fair, where we hope to receive a prize for our latest book – Mobs, Messiahs and Markets. Paul Krugman got his Nobel. We’re hoping for something too…perhaps a little smaller.

But we are working hard on our Special Emergency Report, where we hope to present a clearer picture of what this crisis really means and how you can survive it…and even enjoy it. Look for it soon.

*** In the meantime, we are getting in the spirit of saving money. Last week, we rode a bicycle home from the office.

“You must have looked like the nutty professor,” said our daughter when we described the scene to her. Bicycle riders feel a sense of superiority and invulnerability that you can’t get in a car or on foot. The rider-propelled, two-wheeled vehicle gives a sense of liberation to scofflaws…and a sense of power to poets. Your editor nearly ran down at least two pedestrians who got in front of him. As for the automobiles, he ignored them…and traffic signals too. Bicycles always seem to have the right of way…and never get traffic tickets. So, he zoomed down the Rue de Rivoli, ringing his bell to get the pigeons and old ladies out of his way. And then he glided through roundabout at the Place de la Concorde…right through six lanes of traffic. Drivers honked at him. Even other bicyclists seemed alternately alarmed or annoyed. But he got home. Safely? Probably not, but at least he was saving money.

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. It annoys me how bicycles can ride in the street when it suits them and then on the sidewalk when that’s the better route. Like wtf that’s not fair! Neither cars nor pedestrians are allowed to do both!

    Reply
  2. Was Aus Govt the first to bail out banking system? ~ Daily Reckoner 7 Oct 08 ~ By the way, did you see in today’s Australian that Aussie banks have been borrowing from the Future Fund? The paper reports that, “Three of Australia’s largest banks have obtained long-term loans from the Future Fund as cash dried up from other sources.” It happened in late March and early April of this year, just after Bear Stearns went belly up.

    “The ANZ, Westpac and National Australia Bank (NAB) tapped funding for up to 10 years.” Leaked documents showed that ANZ borrowed $500 million from the Fund. What NAB and Westpac borrowed were not disclosed. ~ end quote

    It appears that Labor and Opposition are working hard to prop up a ‘rocks and crops’ economic system that deindustrialised years ago. Aus it appears was the first to bail out the bankers, and the statement that our banks are in good shape is simply not the case.

    Lindsay Tanner, Finance Minister stated to Lateline ABC that he does not know the debt/equity ratio of the banks. By all account USA and UK banking systems are 1:50, 1:60 ratio of cash to asset inflated.

    The priority of G8 disbursements of cash (what money is left)will leave Aus high and dry having to put up interest rates to get the more expensive money from overseas. Aus Govt is spending its way out of the recession with valuable surplus cash to purchase goods that other countries make, leaving aside the money for smokes and pokies, and over inflated fuel from greedy petro companies that the Govt will not control.

    What do we do about the 700,000 ex pats that want to return home to Aus when things get tough overseas.

    Aus needs radical surgery to its tax and finance system, its way of life. Australia could easily face a prospect of Regional instability unable to feed or defend itself – what about this as a suggestion of ideas that many others have thought of:

    1. Abolish all personal income tax; [currently superfluous employment practice]

    2. Increase GST to 12% (increases to be by joint Parliamentary sitting)everyone pays no exceptions; [alt 1. & 2. currently allowing black economy to flourish]

    3. Company tax reduce to 20% and can be reduced further to 5% through (a) R&D (b) Training through RTOs (c) OH&S practice; [to create productive employment]

    4. Public company & public sector execs come under award structures and performance bonus;[to create productive employment currently superfluous employment practice]

    5. All compulsory super schemes nationalised with employed and unemployed to meet additional contributions ~ all citizens including parliamentarians having access to fair and equitable retirement pension income retrospectively ie minimum old age pension is a retirement pension bare minimum where an individual has never worked and has never had a superannuated working spouse; [currently superfluous employment practice with waste and white collar corruption]

    6. Centralise the job market scheme so that prospective employers and employees can be directly matched, the current system is convoluted by employment bureaucracies that don’t work effectively and encourage rorting and fraud. We could solve the skills shortage as an example with full time trade training instead of the medieval apprenticeship approach. [currently superfluous and negligent employment practice reducing productive employment]

    7. Australia must industrialise and fast track nanotechnology, and the Australian Govt become a co investor in industry. Keep population small to technology needs, to balance with the natural order of things. The free enterprise system free of monopoly ~ nb nanotechnology will make the cost of labour irrelevant. -[to create productive employment]

    8. The abolishing of all State and local Govt and establish Regional Govts. The Commonwealth should federate all industrial awards, and general law, public health (establish medical practices in public hospitals and underwrite all negligence insurances), education, national rail gauge maglev technology (400 – 500 kph), etc, etc. Regional Govt have control over law and order and town planning, some environmental, the low level stuff that is specific to the regional performance – keep Regional Govt small but involved [currently superfluous employment practice]

    CONCLUSION: We are going to have a massive fallout in employment regardless because too many Australians are employed in work that is useless having no inkling to resource or industrial production needs, we are borrowing capital from he rest of the world to maintain unrealistic employment practices and thus lifestyles which divests money away from solving 3rd world problems. Our leaders have failed us, the place is being run by spivs and hoons. I suppose none of the above suggestions can get even close to happening, but I think it’s better than what we have currently.

    Aus may as well devolve in a controlled manner the unproductive employment practice into productive employment before the big one ‘we had to have’ hits us.

    Charles Norville
    October 21, 2008
    Reply
  3. Nothing has change over 1000’s of years
    The kings and queens and royalty
    The boys club
    They control the world
    With Rudd and Turnble were they rich first then got into politics or was it the other way round or both.

    It does not matter who gets in they will suck the earth’s riches out at any cost for there own well being.

    They think the earth will just take it.
    Sad but true
    Printing Money wont save the earth only respecting the earth will save it
    the earth and life is real the stock market is only numbers and lights

    Reply
  4. Argentina’s President Cristina Fernandez has signed a bill that will nationalise the country’s 10 private pension funds. viz item 5 above

    Charles Norville
    October 22, 2008
    Reply

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