Once upon a time, when credit conditions and the costs of borrowing money were normal, the bank opened at 9:00 a.m. and closed at 5:00 p.m. For eight hours a day, bankers made loans and took deposits, and then they went home.
But after 9/11, the Fed opened the spigot. Short-term interest rates went to zero in real terms and then into negative territory. When real interest rates are negative, borrowing money is effectively free – the debt loses value faster than the interest adds up.
“Now they [the banks] have all this excess money. And they open at nine, and from nine to noon or so, they’re doing all the same kind of basically legitimate things with it that they did before.”
“But at noon, they have tons of money left. They have all this supply, and the, what I would call ‘legitimate’ demand – it’s probably not a good word – but where risk and reward are still in balance, has been satisfied. But they’re still open until five. And around 3:30 in the afternoon they get to such things as subprime mortgages, OK? And what you guys haven’t seen yet is what happened between noon and 3:30.”
He later says:
“Buffett once told me there are three ‘I’s in every cycle. The ‘innovator,’ that’s the first ‘I.’ After the innovator comes the ‘imitator.’ And after the imitator in the cycle comes the idiot
and to reinforce the point:
“We’re in the third ‘I’ for sure,” he interjects an hour after first introducing the “rule.”
I’m hearing a heck of a lot of bearish sentiments from the USA, backed up by a general feeling when I was over there that times were pretty tough. While Obama provides some general optimism the power of economics is looking to tumble some serious players. Expect markets to fall more,.