Are We Looking at the End of Too Big to Fail Banking?

Ok, the headline is far fetched but is it so far beyond the realm of possibility that consumer deleveraging is going to drive the Too Big to Fail (TBTF) banks into insolvency? Forgive me as I write from my own perspective while I hunt for a few statistics and outside anecdotal quotes to support my proposition.

The Key to Enslaving a “Free” Population Is Insurmountable Debt

If I were of the mindset I wanted to rule the world or at least own the best parts of it, how might I best accomplish this? One old solution is military force, which as we have found in the United States (again – given we refuse to learn our lesson) is expensive. Further, violence tends to beget violence which damages those nice things we like to own (such as in acts of retaliation like the World Trade Center attacks perhaps).

If I can’t expect to reasonably obtain by force what I want, then if I want vastly more than my share of the global wealth then I need to find some other way to get it. I would have to find some way of making others (on a large scale) THINK they were getting what THEY wanted, but in reality they were giving me what *I* wanted. By now you should know where I am going with this of course. The way to give people what they want while getting what you want is to create psychological need for *things* of status, inflate prices beyond the means of a modest percentage of the population (but not everyone), and then issue debt to those *just* able to afford the payments.

Global Enslavement Beyond the Wildest Dreams of SPECTRE

Sound familiar? Wall Street has developed expertise in this beyond the wildest dreams of any fictional megalomaniac. They got so d*** good at it that they not only found ways to get people to borrow money they could not afford to repay, they then stripped, packaged, and re-sold these same loans BACK to 401K funds, pension funds, and individual investors who initiated the loans in the first place!

The success, of course, of any such plan would require the ability to draw in as many victims as possible (inflating demand to as high a level as possible). By packaging loans into securities and getting Government complicitly to back said loans (via Fannie and Freddie) or by other means (getting ratings agencies to rate loans AAA), the costs of borrowing were dramatically reduced. The results of lower borrowing costs of course were a.) increase the number of “credit worthy” victims, and b.) inflate the price of “things” based on the increased demand.

We have seen the results of just how many moths were drawn to the flame (loans held by Fannie and Freddie and other GSAs or pledged as toxic collateral to the Fed), and how many of those moths were killed in the flame (bankruptcies, foreclosures, defaults, distressed assets).

Overwhelming Consumer Response to Debt Enslavement: Deleveraging

One of the most substantial outcomes of the government bungling of the Too Big To Fail banks has been the resultant consumer DISTASTE for DEBT. In normal times I would say consumer distaste for debt is a good thing, but now I beg to differ. People who normally might be willing (and able) to take on debt to finance a purchase of a durable good or real-estate are loathe to do so. NOBODY in their right mind wants to be beholden to Wall Street bankers (either directly or indirectly). Savings rates in the US are at levels not seen in some time (recent print was 5.0% July after 5.5% June), and consumer borrowing continues to drop (thanks Merrill Over Matter for following that). Real wages are falling. Long term unemployment is at historic levels. Labor force participation rate is at all time lows.

It’s bad enough that virtually everyone in America hates Wall Street. That alone is bad enough for the economy. Add to that people’s wages (if they have jobs) are falling (except for the debt OWNERS), and prices of necessities (food, energy) are rising.

What you get, is a crisis of confidence. Our political leaders have failed. Our institutions have failed. This is why you’re reading about the CEO pledge AGAINST campaign contributions. You’re also seeing CEOs in leading multinationals such as WalMart bemoan rising inflation and falling consumer confidence levels impacting sales. It’s why you see GDP growth slowing to near contraction. It’s why the debt-ceiling stand-off pushed people over the edge.

Americans can’t trust the Too Big to Fail banks, they HATE Wall Street, and they can’t trust their politicians.

And this is a recipe for GDP growth?

On second thought… I really don’t need the charts… the facts speak for themselves.