The cause of this problem was unsound money so the only solution is sound money. If people want something they must pay for it up front, and that includes governments.

I disagree with your take on the FDIC. That agency is the only appropirate organization to clean things up; I would much prefer that the recent bailout had given $700 billion to the FDIC, than to Hank Paulson (words left out)

The banks the FDIC takes over or arranges a shotgun marriage for are hopeless. Washington Mutual was headed to the dustbin, and its bondholders would have received nothing, because WAMU’s loans far exceeded the value of the underlying property, and when people sense that they are hopelessly under water on their mortgage, they default, since it would be economically suicidal for them to keep paying 60% of their income to try to keep the house.

I am a real estate agent in the San Francisco Bay Area, and I saw WAMU and Wachovia’s loans. They were atrocious, and it was obvious at the time that absent 15% annual house price appreciation, those loans would default.

Capital that would go to those institutions destined to fail would be better used on institutions likely to succeed. The way for investors to get in on that action, is for the US to fund its bank bailout with Treasury debt, which will be one of the only instruments out there that will be reliable in the coming deflation, which is now underway and cannot be stopped by any desperation move by the government.

Much like the recessions of 1974, 1981 and 1991 were driven by the need to cut obsolete capacity from manufacturing the recession of 2008-9 will be driven by the need to cut out surplus capacity from the finance sector.

As an indicator of how much the financial sector has been sucking out of the real economy is the startling estimate that the fees and margins for bankers in producing and trading CDO’s and CDS’s (the toxic stuff that is imploding) over the last three years is in excess of $1.5 trillion. That is more than the likely losses on the US mortgage market. ($12 trillion total mortgages outstanding at 10% bad and only 50% recovery = $1.2 trillion). Bankers fees are as much a cause of the loss as the imparirment of the underlying assets.

However if we redeploy the mathematicians and physicists from investment banks to teaching and engineering maybe we can restore competitiveness in the things that make life possible.

The chickens are coming home to roost. The honest answer is that if the people of the west want to restore their living standards they are going to have to get people out of welfare and non-productive public sector jobs, to upgrade education and training, and to start working a whole lot harder and smarter.

Nobody in any western government has yet been ready to level with people. Osborne “the cupboard is bare” falls a long way short, and Brown and Bush are in total denial.

The wealth of the world has not been destroyed, but far more of it is now controlled by the Chinese, Russians, Saudis et al. They will recaptialise western banks eventually because they need the western consumer to keep on consuming, but they will do it in ways which make a permanent change in the distribution of power in the world.

To minimise the damage western governments need to stop wasting time with the blame games, level with people, and start to put together a regulatory environment that encourages current shareholders to put the banks back on their feet. Thye need to get government out of the way of companies trying to remain competitive in world markets. That means slashing non-jobs and long term benefits to balance the governments books, encouraging retraining, and gettting the cost of compliance with government regulation by companies and individuals back to affordable levels.

BAsel II is recent. Basel I is the system of banking regulaiton that had most effect on the build up of excessive debt. It was a permissive regulatory framework which meant banks thought they were behaving sensibly when gearing.

(The FDIC) has activty been using the powers of the State to force the sale of banks considered weak to other, larger banks – the problem being that in the process, the debt holders of the sold bank are being wiped out. If the bank had actually failed and liquidated, those debt holders would have been made partially whole or even whole (depending on which type of debt they hold).

Given the uncertainty about which banks are truly weak and which not, providing capital is risky enough – but if you buy the right kind of debt you know, barring (the FDIC), that you’re likely to get back most or even all of what you provide.

(The FDIC) however has turned this on its head; for now if you invest in a weak bank, that bank may in fact be sold, and you will get *nothing*.

There’s plenty of money out there. The problem is confidence. Investors are not confident in banks. Anything which aids confidence will act to help solve the current problems; anything which acts to reduce confidence will make them worse.

The FDICs actions are making this banking crisis significantly worse by scaring investors away from banks. It’s all very well rescuing one or two banks; but if by doing so you make it all the more likely a whole bunch more will fail when they would otherwise have not, what have you achieved?

If only the State would not involve itself in the market. None of this would have happened in the first place and now we would not be watching the State make a bad situation worse.

Bank shares will fall further from now. Foreign investors will wait until this happens. I will also wait. They need teching a very big lesson.

Surely, the “shorters”, or more correctly, marketmakers began to take the opposite view. There was the danger at one stage, was there not, that banks’ shares, and therefore the equity cover for their liabilities was becoming so depressed that they were in danger of breaching Basel rules, thereby triggering further limits on their activities, and inevitable bankruptcy.

This is the potentially catastrophic position we are in at the present time. No British bank wants to lend to another British bank because it is not sure the money will be coming back. The Bank of England is currently supplying life-support to the whole of the British banking system (announcing on Friday it would be supplying cash in return for car loan collateral, for God’s sake)

Given this situation, why on earth would anyone want to lend money to them? Sovereign wealth funds – already burnt having been suckered into mug investments in US banks which have subsequently turned belly to the sky – are not going to be tempted into that game again.

Reply: The big British banks are viable. Yes, there are many banks around the wrold that need new capital, where it would be possible to raise the money by share issues.

Will this be any different under Call Me Dave? I can’t see it: he pointedly rejected the rights of the individual for “social democracy” (what a oxymoron that is!)

I despair, I really do. I can actually start to see a Britain that will end up as a communist dictatorship.

As an amateur economist, I am still not convinced that deflation is a more likely outcome than inflation. History tells us that in the long run excessive money supply that outruns the productive output of an economy always leads to inflation.

If I was a central banker I would be engineering a large dose of inflation because inflation reduces your debts going forward. I would also engineer it to be more profitable to invest in my governments IOUs than in the likes of gold or commodities. It is starting to look like the US authorities are doing both these things. (selling physical gasoline and gold reserves, to push the price down)

Joe Sixpack will be pleased when the “Price” of his house goes back up in dollars (or pounds). He will not discern that the “Value” it represents will have gone down relative to other prices.

Can I recommend to Redwoodians that you read the articles dated October 3rd by Rob Kirby; Andy Sutton and Jennifer Barry at:-

http://www.marketoracle.co.uk/

I am starting to think there is a very clever “sting” going on here that Paul Newman would have been proud to star in. Can’t wait for “The Sting 2″. There has got to be a movie about this lot of crooks.

On the matter of liquidity each nation state could establish a state bank that can issue loans to lenders and later recall and destroy the issue of money, after all money, unlike commodities, has no intrinsic value as such, and, if properly understood, is only a promise to pay. So the creation of loans by the state, the recall and destruction of the said paper at a later date by the state, would provide liquidity and create values, without increasing the money supply in the long run. I don’t believe the west should be looking to the east for investment, we need to remain autonomous in the creation of money and becoming dependent on the east would make us vulnerable economically and politically.