The government's financial rescue has shoveled billions of taxpayer money into the coffers of big banks that are still over exposed to derivate risks as the chart above shows. The re-inflation of the Street of Broken Dreams has allowed bankers to write off some bad debt while still maintaining security prices, thus masking the true seriousness of the economic downturn. Some economic analysts are expecting a "return to fear" in the market as the next wave of illogical ARMs--option ARMs--are scheduled to reset [chart below]. Bankers know this and are expecting another cascade of delinquencies and defaults, which may be good reason for hoarding government cash in their vaults. Banks will also need to refinance $1 trillion in commercial mortgage backed securities.
All of the extraordinary intervention has not removed the systemic risk of toxic derivatives from the financial system. The International Bank of Settlements recently issued a report warning of the peril of not removing the toxic assets from balance sheets: "The lack of progress threatens to prolong the crisis and delay recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate economy." Testimony before the Senate Banking Committee characterized the trade in credit default swaps as akin to "betting on the temperature". To argue that mathematical models accurately price swaps is "a ridiculous deception that should be rejected by Congress and by regulators....CDS contracts and complex structured assets are deceptive by design..."[1] This negative prognosis is supported by the anecdotal evidence contained in the Federal Reserve's "Beige Book" a report on economic conditions in each of its twelve districts. The report says, "credit conditions remained stringent or tightened further...Districts reporting on non-financial services indicated that for the most part activity continued to decline." A key factor in the continued decline of economic activity on Main Street is that consumers are deleveraging for the first time in many years (130% of disposable income down from a decades high of 133% in 2007). The San Francisco Federal Reserve Bank noted this otherwise positive development is not good news for counteracting deflation since 70% of our GDP is based on consumption. Our most populous state, California, with an economy larger than Russia, China, Brazil, India or Canada ($1.8 trillion) is literally busted and issuing IOUs. Uncle Sugar has to find ways to give money to the real engine of the economy, the American consumer, because Wall Street fat cats are sure not going to spare a dime[2].[1] Christopher Whalen co-founder of Institutional Risk Analytics http://www.marketoracle.co.uk/Article11825.html
[2] read Matt Taibbi's expose on Goldman Sachs in Rolling Stone. www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine