MARK THOMA directs us to a Wall Street Journal piece titled, “Raise Rates to Boost the Economy”. I’m not convinced it isn’t a parody piece aiming to undermine the case for interest rate increases. See for yourself:The chairman of the Federal Reserve is stuck between a rock and a hard place—well, more like a house and a gas tank. How to escape? Mr. Bernanke, raise interest rates now…It’s all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000?Some banks will sputter, and maybe even fail, even the big boys…Hopefully the FDIC is ready to dive in and remove the remaining toxic mortgage assets of any failing banks, along with their managements, and then refloat the institutions…But along with a likely lower stock market and failing banks will be several positive effects that will finally kick-start the economy. Oil and wheat and commodities will see a 20%-30% drop in price as speculators run for the hills. This will be a de facto tax cut for consumers. Hiring should restart when businesses see normal short-term rates, most likely 2%.In the event that it’s meant to be taken …

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Issue:  The joy of growing old Fly Title:  Lessons from Iceland Rubric:  Iceland has been tough with creditors and kind to itself. Ireland may wish it had done the same Location:  London and Reykjavik Main image:  20101218_fnp001_0.jpg »Coming in from the cold Dating game Exploding misconceptions ReprintsRelated topicsEconomic crisis Economics Banking Financial services Industries A second lesson is that the benefits to a small country of being part of a big currency union are not all they were once cracked up to be. When panicky investors were rushing out of small currencies in the autumn of 2008, the euro seemed a haven. There was much talk in Iceland of fast-tracked membership of the European Union and, ultimately, the euro. Two years on, the euro looks more like a trap for countries struggling to regain export competitiveness. Greece and Ireland have lost the confidence of markets, even though both issue bonds in euros. Iceland’s voters are cooler about joining the EU and the euro. Both lessons have to be heavily …

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Issue:  Angry America Fly Title:  Bank failures in America Rubric:  More lenders are going bust but most of them are minnows Location:  NEW YORK Main image:  20101030_fnc546.gif THE sound of banks being shuttered hasn’t been this loud since the savings-and-loan crisis in the early 1990s. Any day now the number of failures in America this year will surpass last year’s total of 140, the highest count since 1992. Yet the worst may be over. Though the numbers are high, most banks being seized these days by the Federal Deposit Insurance Corporation (FDIC) are tiny. Measured by assets this year’s crop is set to be roughly half the size of last year’s and less than a third that of 2008 (see chart). “We’ve turned the corner in terms of the system’s vulnerability, if not in terms of raw units,” says Gerard Cassidy of RBC Capital Markets. The FDIC’s deposit-insurance fund, which is financed through levies on lenders and is used to absorb losses incurred by failed banks’ depositors, is crawling back from the brink. During the crisis the fund …

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Fly Title:  FDIC-insured “problem” institutions Rubric:  America’s commercial banks remain fragile Location:  The American economy and Wall Street bonuses may be growing again, but many of America’s commercial banks are still fragile. According to the Federal Deposit Insurance Corporation, which is on the hook for the money people have in failed banks, 140 banks went under last year, more than four times as many as collapsed in the entire eight-year period from 2000-2007. Forty-five banks failed in the last quarter of 2009 alone. The agency reckons that another 702 banks, with total assets worth $402.8 billion, are in trouble but have not failed. The number of these “problem institutions” is more than nine times as great as in 2007; the total assets held by such troubled banks is more than 18 times as great.

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Issue:  The data deluge Fly Title:  Rubric:  Location:  Main image:  201009INC057.gif The American economy and Wall Street bonuses may be growing again, but many of America’s commercial banks are still fragile. According to the Federal Deposit Insurance Corporation, which is on the hook for the money people have in failed banks, 140 banks went under last year, more than four times as many as collapsed in the entire eight-year period from 2000-2007. Forty-five banks failed in the last quarter of 2009 alone. The agency reckons that another 702 banks, with total assets worth $402.8 billion, are in trouble but have not yet failed. The number of these “problem institutions” is more than nine times as great as in 2007; the total assets held by such troubled banks is more than 18 times as great. In this sectionOutput, prices and jobs »FDIC-insured “problem” institutions Markets

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SOMETIMES one has to go with serendipity. Hedge fund guy’s comments on my last post came just after I read the strategy weekly of Albert Edwards of Societe Generale. Both drew attention to the FDIC’s list of failed banks. Before today’s update, 16 banks had failed this year from Premier American in Florida to Evergreen (oh, the irony of these names) Bank in Washington state. They are failing from sea to shining sea. The pace shows no sign of slackening – another 16 failed in December while in January last year, the FDIC only condemned six. Commerical property may be the weak spot. Edwards also points out that the delinquencies on commercial mortgage-backed securities rose to 5.42% in January, the biggest monthly increase on record.  UPDATE: Another four banks failed in the last week, says the FDIC. The sea to shining sea theme continues, with Marco Community Bank in Florida exiting along with La Jolla bank in California. But the irony prize for names must go to the George Washington savings bank, chopped down in Illinois.

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Issue:  Big is back Fly Title:  Banks in the deep South Rubric:  Georgia’s troubled banks Location:  New York Main image:  CorbisThere’s peanuts left in Georgia There’s peanuts left in GeorgiaCorbis SUMMER in America’s deep South is usually a mixture of backyard barbecues, baseball games and sweet tea. This year, however, there has been no respite for regulators trying to contain the banking crisis. On August 21st BBVA, a Spanish lender, agreed to rescue, with government support, Guaranty Bank, a failing Texan firm with $12 billion of deposits. Across the Gulf of Mexico, in sweltering Georgia, things look worse. The state accounts for a fifth of the 100 or so bank failures in America since the start of 2008. There may be more to come. Each week the Federal Deposit Insurance Corporation (FDIC) announces more failures in America. It has a secret list of more than 300 “problem banks” that are at risk of going broke, most of them small-town lenders. To identify bad banks, analysts are again using the “Texas ratio”, which compares …

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BUSINESS INSIDER’S Joe Weisenthal has a nice post which accomplishes several things. It links to a good story on continued small bank failures in America. It makes some interesting points about how things might have been different had a wave of small bank failures preceded serious trouble at the large institutions, rather than (mostly) come after the troubles at the big firms. And it includes this wonderful (and evocative) Paul Kedrosky quote:But the reason why all these banks had the opportunity to so quickly make so many bad loans, and why so many banks and loans failed so fast, is because of the systemic problems in banking, many of which were tied to loan exotica. In other words, it didn’t matter that the failing banks didn’t pee in the pool, other banks did. And in banking, like life, the notion of a peeing and a non-peeing section in a swimming pool is meaningless.I think it’s worth stepping back and observing that all of these bank failures represent a triumph of government policy. These days, a bank failure is fairly unremarkable. Depositors are safe, so there are no bank runs. During the Depression, before deposit insurance, things were very different. Here’s Ben Bernanke:[T]he banking sector faced enormous pressure during the early 1930s. As depositor fears about the health of banks grew, runs on banks became increasingly common. A series of …

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Peter Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. This discussion can be followed in its entirety here. CYCLE-PROOF regulation is one of those ideas, like regulating systemically important companies, that sounds good on first hearing but immediately collapses when subject to even limited analysis. What’s wrong with the idea of systemically important companies? If the government should designate systemically important companies, these institutions would immediately be seen in the markets as too big to fail. As a result, they would seem less risky than their competitors, pay less for their money, and eventually drive all competition from their market. Think Fannie Mae and Freddie Mac in every financial market, not just housing finance. What’s wrong with cycle-proof regulation? Every idea creates more problems than it solves. First, it requires regulation, which in the banking industry has been an abject failure. We should recognise by now that regulation introduces moral hazard, raises costs, and suppresses competition and innovation, but doesn’t actually prevent risk-taking or failure. Of course, for banking (and a few institutions such as Fannie Mae and Freddie Mac) regulation is essential because government backing has eliminated or seriously impaired market discipline. …

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Issue:  A cruel sea of capital Rubric:  How to handle bank regulation Location:  THE modern history of financial crises emphasises the importance of banks, their tendency to lend recklessly, and the role that deposit insurance plays in creating moral hazard. So are governments having second thoughts about their deposit-insurance schemes? Not a bit of it. Many of them regard deposit insurance as politically unavoidable, and they and their financial regulators are pretty relaxed about moral hazard. There is plenty of talk, and even some action, in regulatory circles about the need for greater market discipline, but no radical rethink of deposit insurance is under way. Rich-country governments continue to export the idea around the world, advising developing countries that deposit insurance is a necessary part of a mature and sophisticated financial system. The number of schemes in place world-wide has been rising steadily for decades (see chart 6). If deposit insurance and other strands of the official safety-net were dispensed with altogether, an utterly different—and much more cautious—sort of banking would necessarily follow. But this is not going to happen. As a …

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