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You Can Bank on It

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It’s a love-hate relationship.

We love our banks because they are the chief engine of growth in the economy. Without the banks, we couldn’t buy homes; new cars never would budge from the showroom floor; businesses couldn’t buy the new machines they need to stay competitive; and, as consumers, we wouldn’t be able max out our credit cards to buy the latest and greatest HD flat screen.

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We hate our banks because they are the main culprit in the implosion of our economy.

Without their myopic pursuit of short term profit over longer term stability we wouldn’t be in this mess.

Can’t Make up Our Minds

If they hadn’t designed ever more complicated financial devices to squeeze more profits out of the real estate boom, the taxpayers wouldn’t be on the hook for trillions to bail them out.

If they’d just shown a little more sobriety, we could have had a happy balance rather than a global economy in crisis.

We may hate them as much as we love them.

But now, more than any time in the past 60 years, we are putting our money and faith in our banks to lead us out of the longest deepest economic slump since the Great Depression.

The decline of financial issues from Bank of America to Citibank has continued to pressure the stock market lower.

Most economists and financial analysts, however, have concluded unless and until the banks recover, the economy will unavoidably continue to contract. As we project into the final quarter of the year, most of these analysts believe that nearly three-quarters of all growth in earnings will be seen in the financial sector.

Losses to Mount for One More Year?

Without resurgence in the banking sector of the magnitude foreseen, the alternative is a continued decline of nearly 5 percent.

The problem on the banking side of the ledger is that mortgage-related losses are continuing to pile up. Even though self-imposed moratoriums, combined with federal intervention, may slow foreclosure rates, the banks still will be compelled at some point to book their losses.

Unfortunately, most banking analysts appear to agree that the real losses may not peak until the middle of 2010. Adding to the potential stress of these real estate losses are the as-yet-unformulated liabilities from predicted consumer credit card write-downs.

While the federal government may have formulated a plan to relieve the banks of their toxic real estate assets, it has yet to address the pending consumer credit card problem. In and of itself, potential credit card losses could pose anywhere between an additional $3 trillion to $5 trillion in liability for the banks.

It appears that the Obama administration may be relying heavily on its economic stimulus package to stabilize the job market in the hope that this may help banks overcome the growing problem of consumer credit deficiencies.

At the same time, the banks have been aggressively curtailing consumer and business credit lines in order to avoid what they anticipate will be another complex financial predicament.

It is a Catch-22.

If the banks continue to cut credit lines, then spending on the consumer side of the balance sheet will continue to shrink.

On the other hand, if the banks are to regain their footing to become the driving force in our recovery, they can’t afford to sustain additional credit losses.

Changes in the marked-to-market accounting rules may aid the banks in reconfiguring their real estate losses, but it will do nothing for liabilities they face relative to consumer credit.

Consequently, it is likely that the administration and the federal government once again will be compelled to step in before the year is over to help the banks cope with this next wave of toxic assets.

We love them.

We hate them.

But, apparently, we can prosper with out them.

John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com