Posted on 01/23/2011 12:42:14 AM PST by TigerLikesRooster
The real cost of Chinese NPLs
Jan 21st, 2011 by Michael Pettis
Posted in Banks, NPLs
Once again I am starting to hear investors tell me that they have been advised by bank analysts not to worry too much about the impact of a banking crisis in China. According to this argument, China has developed a very efficient and low-cost way to address banking crises, and the proof is that China’s last banking crisis, which occurred only a decade ago, was quickly and easily resolved. I am afraid this argument makes absoutely no sense and is based on an inability to understand how the crisis was actually resolved.
Throughout modern history, and in nearly every economic system, whether we are talking about China, the US, France, Brazil or any other country, there has really only been one meaningful way to resolve banking crises. Whenever non-performing loans or contingent liabilities surge to the point where the solvency of the banking system is threatened, the regulators ensure that wealth is transferred in sufficient amounts from the household sector to borrowers or banks to replenish bank capital and bring them back to solvency. The household sector, in other words, always pays to clean up the banks.
There are many ways to make them pay. In some cases, and certainly in the US before the 1930s, banks simply defaulted and their depositors absorbed the full loss. In that case it was the actual bank depositors, mainly households, who directly bore the full cost of the losses, in the form of reduced, or sometimes no, repayment of their deposits.
(Excerpt) Read more at mpettis.com ...
P!
To my weak and uneducated mind this seems to be saying that the Chinese banking crises, if there is one, is similar to our housing bubble and burst. Too much cheap money foisted upon people who didn’t really want or need it. They then built things for which there was only artificial demand. When the demand proved empty the banks ended up with lots of NPL’s.
In our case, Freddie and Fannie were the culprits, along with the Democrat politicians, but the outcome was a foregone conclusion. The “households” always bear the brunt as either taxpayers or consumers. There is no other source of money.
This can be explained as the unintended consequences of good intentions or it can be called what it really is - a manufactured crisis by Soros and gang to collapse the world’s economies and replace them with a new global currency and a one world government.
We have what is called "fractional reserve banking". A bank takes in deposits, for sake of simplicity, lets say $100. How much money can the bank lend? People stuck in the old morality, would naturally say $100. That's all they have.
Well, the modern banking system, through the magic of fractional reserve banking, only need to keep a fraction of their deposits on reserve. So, banks can lend, say $500. How's that possible? They lend the same dollar out 5 times and collect interest on those magical dollars. It's legal (for banks).
So, they used to have "runs" on the banks, when people believed that their money wasn't in the bank, ie they wised up. The government stepped in with guaranteed deposit insurance, so that taxpayers in the end are on the hook for saving the banks.
This wonderful system gives us the business cycle, inflation, depressions and all kinds of new powers for the government while our wealth is set up for theft.
It's great. And if you don't believe it, you're some kind of nut.
Now, I'm really hoping that Ron Paul, as chairman of the Banking Committee is going to expose all of this rot. It's going to be fun to see the establishment run around like stuck pigs.
Very Austrian analysis. Awesome! : )
You forgot another little anomaly of the banking system. Money they have on hand (deposits) is considered a liability (accounts payable) and money they no longer have (loans) is considered an asset (accounts receivable). So, money on hand is bad, money at risk is good. However, it is perfectly logical as long as the market is allowed to work and is not distorted by the government, i.e., the Federal Reserve Banks.
Banks pay interest to attract money from depositors and they make money by charging borrowers a higher rate for the risk they are taking. Of course, they try to minimize that risk with collateral that is worth as much or more than the loan. Works fine, once again, until the government gets involved, i.e., the act, the name of which I forget, but the one passed under Carter and reinvigorated under Clinton which forced banks to lend money to unqualified borrowers, and then guaranteed them with Fannie and Freddie. I think it is the Community Redevelopment Act.
The FDIC is money that comes from the banks.
Now, the banks are making money without risk. They are getting money basically free from the Fed an in turn by government securities that pay interest. There is no need to lend money and take risk.
I am sure you know all this. I am just making sure that I do. :-)
Thanks. As Rush used to say, I must have swerved into it. Those von guys, von Hayek, von Mises, were pretty smart.
Where have you been?
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