Who's next after Lehman Brothers is fed to the wolves?
The hunting packs switched instantly to AIG yesterday, driving down its shares by 70pc in early trading. The world's biggest insurer is suddenly on the brink of collapse as well. The killer virus is striking deep into a whole new sector of the financial system.
"This is a potentially very dangerous situation," said Professor Tim Congdon from the London School of Economics.
"Banking system capital is being wiped out. The risk is that this could lead to a contraction of credit and set off a self-reinforcing downward spiral, leading to the sort of debt-deflation we saw in the 1930s.
Emphasis added by me.
That's understatement. You'll see Ambrose agrees, later.
When creditors cut off funding to Bear Stearns in March, the Fed reacted with dramatic speed. It invoked nuclear powers under Article 13 (3) of its charter, allowing it - in "unusual and exigent circumstances" - to take credit liabilities on to its own books for the first time since the Roosevelt era.
It was fiercely criticised for rescuing Wall Street from its own folly, but the risk was a meltdown in the vast, untested market for derivatives. Bear Stearns alone had over $13 trillion in contracts, with heavy exposure to the turbo-charged CDS credit swaps that so terrify the New York Fed.
Red Alert emphasis added by me.
OK, that's the first time I've read a number that big pertaining to this Armageddon. The highest I've read before -- and it was scary enough back then -- was five trillion dollars. And that was the grand total of Armageddon. Now suddenly another seven trillion comes out of the woodwork?!!? Just how many trillions of dollars are actually in jeopardy here as the final total?!
With the tail risk of a derivatives Chernobyl out of the way, the Fed and the Treasury at last feel safe enough to strike a blow against moral hazard. The line has to be drawn somewhere.
Unlike mortgage giants Fannie Mae and Freddie Mac, broker dealers are not crucial pillars of the US housing market. Lehman is an optimal candidate for ritual sacrifice.
While the appearances of free market discipline have been upheld, the reality of the weekend events is a further lurch towards socialism, or state capitalism if you prefer.
Emphasis added by me.
Superficially, one can blame Lehman and its ilk for the excesses that led to this crisis.
However, the root cause lies in the actions of governments across the Western world. They held interest rates too low for much of the past two decades, and encouraged the debt burden to explode to unprecedented levels.
This reckless experiment has left our societies acutely vulnerable to a sudden reversal of debt issuance, or ''deleveraging" as it is known. The ferocious purge now under way will come at a high human cost. Millions in Britain, Europe, the US, and the rest of the world will lose their jobs over the next two years, through no fault of their own.
Emphasis added by me. I'd make that hundreds of millions of people.
Having caused this crisis, it would now be remiss for governments to pursue a policy of strict debt liquidation in the name of capitalist purity.
As the bankruptcies mount, the state will have an obligation to step in to preserve social stability. If that means the temporary nationalisation of large chunks of the Western economy, so be it.
Emphasis added by me.
That might work over in Europe. But we have politicians here who are 100% batfuck insane. They will lie for God, they will kill in the name of ideology and feel holy about it, and they will see a starving populace as undergoing the Wrath of God for their sins. This is not the kind of leadership that can -- or will -- do any good.
Are any of you beginning to understand the outer dimensions of this yet?
All prior Chronicles of Depression 2.0 posts. Read them before you must.
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