The thinking at the time held that, since commercial banks experienced such devastating losses when the housing bubble burst, they would receive bail-outs from the government. Then, the same banks would slowly but surely appear to gain back the billions that had been lost, all the time running this data through the income statement as a reversal of accrued loss provisions.
This trend continued for years, in fact marking the longest expansion in US history, but now, it is shifting dramatically into reverse. Instead of releasing loan loss reserves, commercial banks are adding to them. This comes, of course, as the numbers of consumer and corporate defaults across the country surge in response to the pandemic and resulting shutdowns and business closures that have dragged on for months. It is a sign that the health crisis is truly taking a toll on US banks.
ZeroHedge.com caught the red flags earlier than most, alerting their readers three months ago to the mounting issues facing commercial banks. As they wrote then, most banks–including major players like Goldman Sachs and JPMorgan–saw massive spikes in loan loss provisions. Goldman Sachs recorded numbers that were quadruple those of last year, and JPMorgan saw the biggest leap, with a 500 percent increase year over year. These indicators from financial powerhouses hint that other banks are probably underprovisioned for what lies ahead. Even with these significant increases from Goldman Sachs and JPMorgan, it will likely not be enough.
The predictions turned out to be accurate. It recently came to light that JPMorgan, Citigroup, and Wells Fargo put away approximately $28 billion for bad loans in the second quarter of this year. This is a jump of almost $10 billion from Q1, and pushes the total to near record levels, second only to data from the worst of the Great Recession in the fourth quarter of 2008. In total, provisions added during the second quarter bring the three aforementioned banks’ 2020 total to a staggering $47 billion. That’s more than they have put away in the last three years combined.
According to banks that hold a coveted bird’s eye view of the economy and where it is headed, things are about to spiral even further into chaos and economic devastation. The number of loans that go unpaid, which has already skyrocketed as a result of the pandemic, will continue to explode.
Analysts at Bloomberg wrote that these figures were much gloomier than they had anticipated, but sources like ZeroHedge.com caught the wave before it broke.
And things could’ve been even more disastrous, but the Federal Reserve nationalized the bond market in late March, pushing out hundreds of billions of dollars in risk-free stocks and bonds, and allowing major banks like JPMorgan to essentially print money.
The Trump administration, on the other hand, is eager to move in the other direction, easing lockdowns, getting the younger generations back to school, and ensuring that businesses can remain open. Director General of the World Health Organization, Tedros Adhanom Ghebreyesus, warned that shifting focus towards economic activity too soon would not end well. In his eyes, the pandemic is still the most dangerous problem facing the United States and the world.
The reality is that this pandemic will stay around for a long time to come. With no vaccine on the horizon, and antibodies that quickly leave the human system, it is something we have to learn to live with instead of damaging the economy every time it flares up.
But because policy has already sunk us into a very deep hole, we will see catastrophes play out across the country, not only bank collapse, but with the very systems that have been in place in the US for centuries. Economic Collapse will continue to worsen, and the depression will last not only through the end of this year but well into the next year as well.
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