Banks in trouble

Banks serve an amazing purpose in this world. They take in individual's deposits and pool them together to loan them to companies or people who want the capital for a business venture they have. The more that folks save, the more cash that is in the bank system and this increased money leads to more loans and more business expansion. 

This expansion is natural and healthy because folk's savings represent capital they could use in the future for more purchases. So, when a business borrows more cash and invests that capital to be ready to produce more products it's a smart call because folk already have more money saved to spend on these products. This becomes a healthy circular formula that is summarised as such [*CO]'higher savings' leads to'more loans to businesses' leading to'more business investment' leading to'great shopper choices' and naturally more roles are made along the way which further fuels the economy forward.

This is down from saving 7.5% of our wages only thirty years back. So we see this current business boom hasn't been built on by folk's savings. On the other hand, economies also grow when IRs are set artificially low as they were set in the States. These low rates spurred the genuine estate bubble to new, fantastic costs never before seen in the States and the globe.

And the superb thing is that there's no business reason for these high home costs outside of the herd mind-set thinking that costs will keep going up.

Well, we've passed that point and are now seeing decreasing costs and skyrocketing inventories of houses available for sale. And not only that, they do so in a dodgier and riskier fashion using variable rate mortgages. Now, US commercial banks face phenomenal risks because over 60% of their total earning assets are mortgage-related!!! Let me repeat that, over 60% of US commercial bank's assets are mortgage related - a postwar new high.

Japan spent the following fourteen years in a business doldrum and is now just starting to see the light of day. Now that rates are going up, and will continue going up, folks who used adjustable mortgages are feeling the pressure of enlarging monthly home loan payments. As a consequence, foreclosure rates are up 38% over last year and bank's bottom lines are feeling this pinch.