It's Going to Be 2008 on Steroids
Crisis occurred when private US banks became so distrustful of one another’s
balance sheet risk that interbank liquidity dried up triggering a systemic
implosion in the unregulated derivatives market, particularly in Credit Default
Swaps (which was a $50-60 trillion market at the time).
Reserve dealt with this situation by suspending accounting policies (permitting
banks to lie about their true balance sheet risk), offering to backstop those
banks with the greatest derivative exposure (JP Morgan, Bank of America,
Goldman Sachs, and Citigroup), shifting trillions of dollars’ worth of toxic
debt to the US balance sheet and then funneling trillions of new dollars into
the banks most at risk of a derivative collapse (the banks I listed before).
terms, the Fed attempted to paper over the problems of insolvency that were
plaguing the large financial institutions. This scheme could have worked if the Fed had demanded that the large banks
decrease their leverage, cease making the deals that created these problems and
began regulating the derivatives market.
Fed is run by spineless academics not financial professionals or real
businesspeople. So the Fed did not implement any meaningful reform. All it did
was temporarily slow the pace of systemic implosion and give Wall Street a “get
out of jail free” pass.
philosophical perspective, the Fed removed the notion of “risk of failure” from
Wall Street’s collective mind. As anyone who’s studied human behavior can tell
you, without consequence for one’s actions most people will take their bad
behaviors to the limit (I am not saying that there is no such thing as a
principled person or one who lives a moral life… but generally speaking, most
people, especially those who work on Wall Street where every move in focused on
making more money, will take things to the max).
As a result
of this, Wall Street went back to doing what caused the Financial Crisis in the
first place: increasing leverage, fleecing clients, and paying its employees’
As a result
of this, the financial system is once again overleveraged. Meanwhile, the large
banks continue to be insolvent due to their gargantuan derivative exposure. Put
another way, the financial system is primed for another 2008 episode. The very
same issues that caused 2008 remain in place. Leverage is far too high. And the
unregulated derivatives market remains a multi-hundred trillion dollar problem.
So this time
around it will sovereign nations collapsing instead of just US banks. Yes,
entire countries will default whether
it be Greece, Italy, Spain, OR the US. There is no way we’ll be paying our
This in turn
will kick off another 2008 episode as all the over-leveraged players (read:
EVERYONE) will have to sell positions to meet margin/ redemption calls.
However, this time around we’ll also see civil unrest as people lose their
social safety nets (unemployment, social security, etc).
follow will be the equivalent of 2008 all over again, along with food
shortages, civil unrest, outbreaks in crime, bank holidays, and the like. It
will, in short, be like what’s going on in the Middle East today (though NATO
won’t be bombing us).
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