Say I own a bank.
By Daniel at 7 June, 2009, 11:52 am
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I receive $400,000 from a customer for deposit into his account. I hold 32,000 of this as fractional reserve and lend out he rest in mortgage. Housing prices drop. The house standing behind the mortgage is only worth $150,000. The depositor of the original 400,000 wants to use it to buy a house. I go into my reserves to get the man his 400,000. I find that I do not have the reserves to cover the man´s demand because they have all been used up meeting claims from other banks. I can´t sell the 320,000 at face value because nobody would buy it that price because the house standing behind it has dropped in value. the collateral foundation has crumbled. So I run to the Fed who gives me the money under TARP and takes the mortgage on at it´s original 320,000 face value in exchange for those dollars. Now what is wrong with that picture?
The Bank for International Settlements (the central bank for all of the world´s central banks)announced that total contraction in reserves is dropping at an unprecedented rate of 22% per
year and accelerating. And they think the market will go up? This world is in a death spiral down into the deepest deflation depression history has ever witnessed.
And the solution is?
Since our home “values” were assessed and approved by the banks, would they then not be able to adjust the principal down accordingly?
The banks have made beaucoup on mortgages on the upraise, and now don’t want to be the ones to lose money on the downside, good game if you can get it!
This has been the year of lost trust in the system, and by that I mean the 401k, investments, credit, job security, govt. It will take a long time for people to forget the fear they have experienced and trust any investment for a while.
Our Grandparents that lived through the Depression were never the same, always saved scraps of stuff, and hoarded canned goods etc. How many of you remember coffee cans full of bent nails in your grandfather’s shop that he intended to straighten and reuse someday?
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