“When Wall Street talks about the “failure” of a bank or other financial institution it means the failure of the company to pay off its own bondholders. It does not mean that depositors, counterparties or other bank customers lose money. A bank is essentially a big portfolio of assets, about 70% which are typically financed by depositors, customers and other liabilities, about 20% by the bank’s own bondholders, and about 10% with the capital of the bank’s stockholders. In a typical bank “failure,” the bank is taken into receivership by regulators, the liabilities to stockholders and bondholders are cut away, the remaining package of assets and liabilities is sold as a single entity to some other firm, the old bondholders get the proceeds of that sale, and the stockholders are wiped out. When investors willingly take a risk, and buy the stocks and bonds issued by an institution that goes on to mismanage its business, this is the appropriate outcome. Depositors and customers typically don’t lose a penny”

“If public funds are provided during a financial crisis, and it cannot be clearly demonstrated that the institution is solvent, the funds should be provided post-failure, as senior loans to a restructured institution where shareholders and existing bondholders have already been subject to losses. The interest rate should be relatively high, to encourage replacement of public funds with private ones. With few exceptions, when public funds are used to avoid major restructuring and shield private investors from losses, the result is almost inevitably a larger, less transparent, and more recklessly managed institution.”

“The same is true for government or “sovereign” debt. When Wall Street talks about “failure” of Greece, for example, it means failure of Greece to pay off its own bondholders. In trying to avoid this failure, Greece is instead forced to impose extreme austerity and depression on its citizens. From the standpoint of those citizens, Greece has already failed them painfully. Those are the choices – let bad debt “fail” or force depression on innocent citizens.”

“In 2008, the Federal Reserve created a set of off-balance sheet shell companies called “Maiden Lane” to buy undesirable long-term assets of Bear Stearns and other financial companies, justifying the purchases by appealing to Section 13.3 of the Federal Reserve Act. But if you actually read Section 13, it is clear that under the law, “discounting” means (as it has always meant) providing short-term liquidity by essentially providing a check-cashing service for obligations that are short-dated, well-collateralized, and promptly collectible. The Fed’s creation of the Maiden Lane companies to purchase bad assets was, and remains, illegal under the language and intent of the Federal Reserve Act.”

50% Contraction in the Fed’s Balance Sheet This is a great article on the Federal Reserve and it’s actions regarding interest rates and Treasuries. It’s a bit of a tough read, but if you can get through it and understand it, I think you will gain tremendous understanding of our current economic regulatory motivations and hurdles.

Handicapping QE3 This one has an in depth look at the results of the previous rounds of Quantitative Easing, and the likely timing and effects of a third round.

For the rest of his analysis, check out the full list of Weekly Market Comments here.

I’ve been pretty quiet about the conflicts around Israel. I don’t really want to get bogged down at the moment in a discussion that always ends up invoking Godwin’s law. I will go so far right now as to say that I agree with Ron Paul on the matter. He seems to be claiming that the U.S. knew weeks in advance that the attack was going to begin. I’m not surprised in a general sense if this is true, but I always figured if the whole of congress knew, it would have been leaked early.

He is right to be more worried about inflation than deflation. Deflation may be the current issue, and if nothing is done about that, we are likely in for a long drawn out recession, but the things they have set in motion will end up causing hyper-inflation in the end. I don’t mean to make deflation seem like a lesser threat; the problem is, deflation is a lot easier to counter than inflation, just print money. We have already printed more than enough to fix the problem, but the government and banks are still keeping it out of circulation. Sooner or later they will have pulled all the strings they can pull and then we will be at the mercy of what is left of the global free market. At that point, deflation won’t be the worry.

I found the video via The Osterley Times. They are a self described left wing blog, whatever that even means any more. The site focuses heavily on very current events, providing relevant commentary and video. If they can find common ground with Ron Paul, they are Ok by me.