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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Tuesday, September 23, 2008

I Suppose That Its About Time.....

For the past 2 decades the American banking system has been losing its mojo. However, over the past year and most lately, in the Treasury's bailout of the American financial system, banks are on track to regain their status as premier financial lenders to corporations around the globe.

You may ask, 'What the heck are talking about Glenzo?' Well, let me tell you, then. There has been a huge disintermediation out of banking into alternate financial products. Take money market funds, for example. Money market funds rose to prominence in the early 1980s since they were able to offer much higher interest rates to investors than the banks were allowed and deposits left the banking system and migrated to these new products. The regulation of the banking system did not allow them to compete in price whereas, competing products were not susbject to the same rules. The Money market funds invested in the commercial paper of the same corporations that were customers of the banks lending businesses. So both deposits and customers left. Then, other companies came in to take away other businesses. Companies such as GMAC that financed the purchases of cars by issuing commercial paper took away more business.

So over the past couple of decades, much business has left these institutions. However, given the stress in the financial system, I venture to guess that people will on the margin move business back to the these stogy banking giants. However, Americans and their bankers will now be moving closer together. We will again be getting our mortgages there and depositing our money there. Large companies will be borrowing money there instead of Wall Street where these loans were, in the past, packaged to look better than they really are.

As the crazy philosopher Nietzsche said....
That which does not kill us makes us stronger.
So, while the typical Democrat is thinking that we are already dead, gnashing their teeth and pointing fingers, the rest of us will be doing what makes sense. On the margin, we will move our deposits into the safer banking system. Banks will become super liquid as the US Treasury buys troubled assets from them and they will be capable to make loans to sensible job creating industries again.

As the gloomy Dr. Nouriel Roubini writes there is more to come.....
The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.
I also agree with him, that we are facing a very severe recession, not just at home, but around the globe. The financial system is being forced to shift gears over a very short period of time and this will cause stress and dislocations. People will adjust, people will figure out how to navigate the new waters and eventually, we will continue on with our living our lives.

What Americans do not realize, since I was hearing extraordinary amount of whining by some people on my trip back this summer, is that some of the same problems that affect Americans also impact many peoples around the globe. Things do not happen in the US in vacuum. Remember, the global economy cannot flourish without a flourishing America. Also, the US cannot move forward till other nations tackle their problems. Europe, is facing much more stress, where government entitlements to healthcare, retirement income and other silly unsustainable wealth transfer programs will not allow these countries to address problems facing them today.

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