Bad News Gaining Legs Among the Otherwise Indifferent

Jul 15 2008

Bad News Gaining Legs Among the Otherwise Indifferent

Published by Johannes Ernharth at 9:16 am

We appear to be crossing over the point where the general population is beginning to realize something serious is in fact going on. Up until recently the worst of the credit crisis has been confined to Wall Street. No doubt, the general population is aware that many who use subprime mortgages are defaulting, a problem that’s been spreading up market into the Alt-A market and beyond. But the real implosions — the hedge funds getting wiped out, the failure of Bear Stearns and other large institutions heavily in the mortgage market — well, let it suffice to say that most folks have not been interrupted from their daily doses of “American Idol” and “Deal or No Deal.”

But as of late, you get the sense that it is beginning to sink in that no matter how many assurances from those on Wall Street, in Government, or at the Fed, these problems are not going anywhere. It only took about seven years to sink in that something serious was changing. Stubborn and ever-rising gas prices are at the epicenter, and with people finally looking at one another as food prices spike upwards 40% on their grocery shelves, folks are finally looking at one another and stating, “this is really serious — are these prices really are not ever going down?” No, we answer. Only up, and for a long while.

The real problem is now the news is getting very personal and quite serious. Banking at the highest level, its been said, is nothing but a confidence game, and while it is clear that confidence has been waning at the highest level (e.g. the credit lock up of the last 12 months), systematic confidence is beginning to slip at the consumer level. In the last few days we’ve witnessed the demise of IndyMac Bank, the 2nd or 3rd largest bank failure (depending on the source) in U.S. history, and the insolvency rescue of the GSEs Freddie Mac and Fannie Mae. And now the rumors begin to swirl on a system that, by design, allows banks to legally keep only a tiny fraction of depositors liquid cash ready for withdrawal by lending out over 9/10ths of that money to earn extra banking profits. This we politely call “fractional reserve banking.” When the gig is up that the bank really has been playing with the money you thought they had on hand on your behalf, well… hello IndyMac, and hello taxpayer financed bailouts, which given the sorry and (long term) insolvent state of the U.S. economy, implies lots of money printing to cover the losses, which is another way of saying “hello more inflation!”

Here’s the news that should be getting your attention, much of which is beginning to break through to the formerly (and usually) indifferent folks that make up the majority of America.