Chris Martenson: "Are We Heading For Another 2008?"

Tyler Durden's picture

From Chris

Are We Heading For Another 2008?

We all know that central banks and governments have been actively intervening in markets since the 2007 subprime mortgage meltdown destabilized the leveraged-debt-dependent global economy. We also know that unprecedented intervention is now the de facto institutionalized policy of central banks and governments. In some cases, the financial authorities have explicitly stated their intention to “stabilize markets” (translation: reinflate credit-driven speculative bubbles) by whatever means are necessary, while in others the interventions are performed by proxies so the policy remains implicit. 

All through the waning months of 2007 and the first two quarters of 2008, the market gyrated as the Federal Reserve and other central banks issued reassurances that the subprime mortgage meltdown was “contained” and posed no threat to the global economy. The equity market turned to its standard-issue reassurance: “Don’t fight the Fed,” a maxim that elevated the Federal Reserve’s power to goose markets to godlike status.

But alas, the global financial meltdown of late 2008 showed that hubris should not be confused with godlike power. Despite the “impossibility” of the market disobeying the Fed’s commands (“Away with thee, oh tides, for we are the Federal Reserve!”) and the “sure-fire” cycle of stocks always rising in an election year, global markets imploded as the usual bag of central bank and Sovereign State tricks failed in spectacular fashion.

Keep Doing More of What Has Failed Spectacularly

Central banks and states responded by doing more of what had already failed spectacularly. In the ensuing years 2009-2012, they increased money supply and liquidity and lowered interest rates to zero or near-zero. And sovereign states borrowed vast sums to squander on “stimulus spending.” This “doing more of what has failed spectacularly” earned the apt moniker of “extend and pretend.” Nothing was actually fixed, but we were encouraged to believe it had been fixed with a flurry of absurdly complex “reforms” that only increased the power of the central states and banks without actually addressing the underlying causes of the meltdown: extremes of leveraged debt, extreme concentrations of financial wealth that then bought political power, shadow banking and opaque markets for hundreds of trillions of dollars in notional derivatives, systemic fraud and embezzlement, phony valuations assigned to assets and liabilities, and various schemes to misprice risk, among others.

If we had to distill the entire global crisis into the simplest possible statement, we might say that the collateral that supported this great inverted pyramid of leveraged debt vanished, and as a result the entire pyramid crumbled.

Since the global housing bubble was at the heart of the crisis, let’s use housing to explain this simple summarization. If a house that was owned free and clear (no mortgage debt) rose in value from $200,000 to $500,000 during the bubble, the collateral of that asset was valued at $500,000 at the peak. If the house has fallen to $250,000 in the post-bubble decline, the collateral is now $250,000.

Since there was no debt leveraged off of that collateral, the owner experienced no leveraged consequence of that decline. His assets fell, and he felt the “reverse wealth effect,” so he feels poorer even though his asset is nominally worth more than it was prior to the bubble. (Adjusted for inflation, that nominal gain might well vanish into a decline in purchasing power, but that’s another story.)

Compare that to the home purchased for $500,000 with a highly leveraged subprime mortgage in which 3% of actual cash collateral ($15,000) was leveraged into a mortgage of $500,000. (For simplicity’s sake I am leaving out the transaction costs.)

The collateral was leveraged 33-to-1. This is delightfully advantageous if the house continues rising in value to $600,000, as that increase generates a six-fold return on the cash invested ($15,000 in, $90,000 out). But once the house prices slipped 10% to $450,000, then not only did the 3% cash collateral vanish, the collateral supporting the mortgage also declined. The mortgage was no longer “worth” $500,000.

Since Wall Street securitized the mortgage into mortgage-backed securities (MBS) and sold these instruments to investors, then the value of those MBS also fell as the collateral was impaired. And since various derivatives were sold against the collateral of the MBS, then the value of those derivatives was also suspect.

If $1 of collateral is supporting an inverted pyramid of $33 of leveraged debt, which is then the collateral supporting an even larger pyramid of derivatives, then when that $1 of collateral vanishes, the entire edifice has lost its base.

And that's at the heart of current central bank policy: “Extend and pretend” is all about keeping the market value of various assets high enough that there appears to be some collateral present. 

In our example, the mortgage is still valued on the books at $450,000, but the actual collateral — the house — is only worth $250,000. The idea being pursued by central banks around the world is that if they pump enough free money and liquidity into the system, and buy up impaired debt (i.e., debt in which the collateral has vanished), then the illusion that there is still some actual collateral holding up the market can be maintained. 

Subprime Mortgages Have Given Way to Subprime Sovereign Debt

The implosion of overleveraged subprime mortgages triggered the 2008 global meltdown because the market awoke to the fact that the collateral supporting all sorts of debt-based “assets” had vanished into thin air. Four years later, we have another similar moment of recognition: The collateral supporting mountains of sovereign debt in Europe has vanished. The value of the debt — in this case, sovereign bonds — is now suspect.

The European Central Bank (ECB) has played the same hand as the Federal Reserve: Do more of what has failed spectacularly. Expand the money supply, pump in more liquidity and buy up the impaired debt all in the hope that the market will believe that there is still some collateral holding up the leveraged-debt pyramid.

The ultimate collateral supporting the stock market is the book value of the assets owned by the company, but the notional collateral is corporate profits: equities are claims on the future free cash flow generated by the corporation.

There are all sorts of inputs into this calculation, and markets are supposed to reflect these various inputs: currency valuations, sales, profit margins, costs of labor and raw materials, inflation and so on. Now that markets are manipulated to maintain the illusion that there is enough collateral out there somewhere to support the inverted pyramid of leveraged debt, it’s difficult to know what’s real and what’s illusion.

One of the few ways we have to discern the difference is to compare various markets and look for divergences. If a spectrum of markets and indicators is pointing one way and another market is pointing the other way, we then have a basis for asking which one is reflecting illusion and which one is reflecting reality.

In 2008, the central banks and governments lost control of the illusion that there was sufficient collateral to support a stupendous mountain of leveraged debt. By doing more of what failed spectacularly then, they have laboriously reconstructed the illusion that they control the markets (“Away, tides, for we are the ECB!”) and thus the valuation of collateral.

Once again we are sternly warned not to “fight the Fed,” as if the Fed had the financial equivalent of the Death Star (“You don’t know the power of the Dark Side!”). Once again, we are in an election year where the four-year cycle is supposed to “guarantee” an up year in stocks.

Or maybe 2012 is shaping up to reprise 2008, and the market will wake up to the fact that intervention doesn’t create collateral, it only creates the temporary illusion of collateral. 

In Part II: Why A Near-Term Market Rollover is Probable, we will look at key technical indicators that suggest the Fed’s Death Star may not be the ultimate financial weapon in the Universe after all. There is a growing series of global data that suggest the run-up in the equity markets has reached its peak, and that the economic sickness the central banks had hoped to "cure" with all of their money printing is metastasing. 

Click here to access Part II of this report (free executive summary; enrollment required for full access). 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sudden Debt's picture

Hey dude, i'm out of money but can you spare a brother a quick hopium fix?
I'll pay you back tomorrow!

BKbroiler's picture

Are we heading for another 2008?

I hope so, grocieries and gold were cheaper

Pladizow's picture

One worrd summary: FRAUD!

The Big Ching-aso's picture



"Are We Heading For Another 2008?"

I hope so.   It wasn't as bad as 1929.


nope-1004's picture

Are we heading for another 2008?

I hope so, grocieries and gold were cheaper

The increase in the price of food staples and the recent fears of inflation are largely overstated.  Rising food prices in developing nations can be attributed to an increasing population and the people within those nations seeking more sophisticated diets.


- Benocide, spring 2011



jplotinus's picture

The word FRAUD does not appear often enough in this thread, though pladizow's first mention of fraud is here noted with appreciation.

Sudden Debt's picture
This is what they had to say in 1946 about price increases

NewThor's picture

We are heading for a '2012'.

Bank on it.

aerojet's picture

Can I write you a check?

battle axe's picture

Those crazy Mayan's were they on to something or stoned out of their heads?

Janice's picture

I prefer stoned, just like the great rockers of the 60's, 70's and parts of the 80's. Have you heard the stuff they call music today?

NewThor's picture

The Jonas Brothers are probably the most anti-establishment rock and roll band ever!


Born-Again Bankster's picture

Today's music is very telling, if you know how to interpret it:


1992:  Barenaked Ladies - "If I had a million dollars"


2010: Bruno Mars - "I wanna be a billionaire"


Inflation even in the lyrics...bitchez.



slaughterer's picture

Who wants one of my "It's only 2012, and it's 2008 all over again!!!!" T-shirts?  They come in red, white and blue.   They cost only 1,680 dollars a piece.  Bullion or semi-automatic ammunition accepted.  

Buckaroo Banzai's picture

We should be so lucky to get another 2008. We're heading for an Argentina in 2001.

Max Fischer's picture



The constant comparison of the United States to Argentina is just flat-out bogus - or, in other words, another perfectly fitting example of barnyard libertardians who don't understand the mechanics of debt, currency and crisis.

The difference between the US and Argentina is that 90% of Argentina's stock of debt was issued in a foreign jurisdiction and denominated in a foreign currency.  This makes them entirely dependent on the FX markets and the whims of FX speculators to service that debt.  Same was true for Weimar and Zimbabwe.

Not true for the United States.  Our debt is denominated in US dollars, and we've got 100% rights on the printing press needed to service that debt. Moreover, if any country foolishly decided to take hostile action against our bonds by dumping them en masse in the market, we've got the world's most sophisticated military to persuade them otherwise.  Luckily, Ron Paul is NOT president, so we've also got a Federal Reserve which is the economic equivalent of being fully armed against economic attacks.  

In the future, please don't make the US/Argentina comparisons.  I've said this before, so it's your last warning.

Don't be dumb. 

Max Fischer, Civis Mundi   

Saro's picture

It's like MDB and Robotrader had a retarded child together and got him his own account here.

Optimusprime's picture

After sending him to neo-con CIA school.

Robslob's picture

1) Countries are just beginning to dump our bonds

2) Countries are just beginning to arrange for "other" currency agreements between each other


Apparently you hate feedom because if RP was President, while it would be painful up front, we could begin rebuilding instead of tearing down...which is what bankers need to do to break even (Hint: make everyone elses real assets worth shit too)

Wonder what will happen to Military pay when none is left to buy our bonds...which pays for the military.

LawsofPhysics's picture

You elude to a point that I have been asking for quite some time.  Why do people so readily discount a military takeover in the U.S.?  Perhaps they think the veterans are all overrun with joy at the high paying jobs they have landed upon returning or leaving the service of their country? < sarc off >.

Koffieshop's picture

You might be onto something here.

I am kinda hoping for a military takeover in one of the PIIGS (when the rioting really takes off) so that the Euro can die sooner then later.

The population needs to be a bit more angry then they are now though.

HurricaneSeason's picture

I'd like to see a takeover. Like the Chinese guy sitting in front of the tank in the square. They should have just let him take over for a week. I don't see any possibility of anyone taking over Detroit or Los Angeles. Even though we are protecting Detroit and Los Angeles from a Russian takeover, we really don't need to do that.

Max Fischer's picture



Countries are NOT beginning to dump our bonds.  Obviously, you're referring to China who has trimmed their stock of US treasuries over the past 6 months, but unfortunately you haven't been told that Japan is INCREASING their holdings by nearly the same amount that China is trimming. Furthermore, you haven't been exposed to articles which tell you that while China is buying less treasuries, they're buying MORE US mortgage backed securities.  While Operation Twist is being implemented by the Fed, and everyone anticipating some sort of clandestine QE effort to jump start housing, why not exchange some long dated bonds for some MBS?  Makes sense.    

Also, there is nothing remarkable about our enemies wanting to end the petrodollar.  Ahmadinejad? Castro? Gaddafi? Saddam?


Max Fischer, Civis Mundi

Koffieshop's picture

There is no chance those MBS are backed with the ownership of the house and land it is build on, right?

Seer's picture

"you're referring to China who has trimmed their stock of US treasuries over the past 6 months, but unfortunately you haven't been told that Japan is INCREASING their holdings by nearly the same amount that China is trimming."

Japan is pretty much fucked.  I wonder how much this comes in to play:

Yukiya Amano even looks like Dick Cheney.  Being that Japan is handcuffed energy-wise, I can see this as being a tit-for-tat: help the US get a hold of Iranian oil in exchange for Japan's US treasury purchases.

Anyways... how long do you think that Japan can hold up US treasuries?  China sure ain't going to be ramping up (they've got to SPEND, SPEND, SPEND internally to keep their masses from coming unglued [lots of luck there!]).  The world's economy is starting to reverse and the US continues to need MORE funding (and so does everyone else).

People often fail to understand that everything really does work on only the slimmest of margins, and that a shifting of a mere 1% to 2% is all it takes...


LawsofPhysics's picture

All fine and good until the rest of the world won't accept your paper.  What a loser.

Max Fischer's picture



Did you know the Federal Reserve devalued the dollar by 40% in 1934 while we were on the gold standard?

My fiat is - potentially - as equally worthless as your gold-standard. 

Max Fischer, Civis Mundi

brewing's picture

we already have an MBD...

Seer's picture

"My fiat is - potentially - as equally worthless as your gold-standard. "

And potentially NOT.  History gives us some idea on the probabilities.  Those who are prepared for the future will fare better than those who do not.

luna_man's picture



Hey, You guy's lighten up on "Max"...He's still living that "american dream", until it smacks him in the nose...Then, you can say: I told you so!

IN DENIAL?...That's OK by us...RIGHT?

ebworthen's picture

Max, Roosevelt confiscated gold and cemented the formation of the nanny socialist state.

And, isn't this an argument to get rid of the FED?

You know, markets and all that?

The FED is a parasite.

MunX's picture

How long have you worked for the AAE?

gnomon's picture

"Argentina 2001"?  We have never been "here" before.  And to believe that we know all of the likely outcomes from this unprecedented manipulation and pumping, and that we have all of our bases covered is the equivalent of believing that one's feces does not reek.

Strange (and terrible) things happen when you are doing the ridiculous and unsustainable, (and your luck runs out).

Raymond Reason's picture

Our currency also has the dubious honor or being the world's reserve currency, and is therefore vulnerable to greater devaluation than the Argentinian Peso.  Even if we could hold a gun to the head of every country with US bonds (and you're dreaming there), the bond market is only part of what holds up the USD. 

The Alarmist's picture

Difference between US and Argentina is that the US version of Evita is decaying before our very eyes ... did you see her with the Saudi king? She looked like Jabba the Hut.

KickIce's picture

And who in this "sophistcated" military is going to fight when their money is worthless?

Race Car Driver's picture

The same sadistic mercenaries who have done it thruout history. They don't do it for money... they do it for the rape and pilliage.

Look around at our current culture - do you really think our military isn't chock-to-the-brim with this type of sicko (see also: Abu Ghraib)?

ebworthen's picture

Max, Max, Max.

Never say never.

Repeat after me:  "The sun will never set on the British Empire", "King Louis XVII rules by the will of God", "All Hail Caesar", etc., etc.

You should get off PBS and outside of the Beltway to see reality beyond that bubble you're living in.

Jason T's picture

Martinson is mint.. but it's like the poor guys been waiting for the great pumpkin.. the great crash.


To a degree, we all are.

vast-dom's picture

"...intervention doesn’t create collateral, it only creates the temporary illusion of collateral." which in turn created the temporary illusion of a recovery.

insanelysane's picture

Did we ever leave 2008?

Clowns to the left_ jokers to the right's picture

I don't think we really left 2001. The housing bubble only gave us a brief faux recovery.


Two thousand and Late. 

Taint Boil's picture



Your screen name is worst than mine.