Banks and countries too big to fail until they do
Posted on 09 December 2011 with 3 comments from readers
Watching the new Holywood blockbuster movie ‘Too Big To Fail’ on a flight back from the UK seemed to provide a strange sense of deja vu with regard to the eurozone crisis.
It was the same roll-out of financially challenging events and an inability to take control that led to the failure of Lehman. Only then did the Fed and Treasury come up with the Tarp rescue package to flood banks with liquidity and stabilize the system.
Phase two
Except that what we are seeing in the eurozone is a reminder that they did no such thing. They kicked the can down the proverbial road and it has come back to haunt us.
The eurozone banks also got cheap capital in the Fed’s mega-bailout and used that to buy the debt of nations like Ireland, Spain, Portugal and of course Greece. You could not go wrong with sovereigns, they thought, ‘too big to fail’ and with the ECB as a backstop.
And yet the ECB president Mario Draghi yesterday pointed out again that this is not a part of his mandate. What we see in Brussels this week is a kind of re-run of what happened on Wall Street in late 2008. Then the big guns failed to save Lehman and the markets took over and did it for them.
Greece is really already there and bankrupt in all but name. If the eurozone leaders walk away without a deal for their Christmas holidays then we are in the final stages of the eurozone endgame.
Euro-Tarp?
ArabianMoney’s worry is that the eurozone will not be able to quickly come up with a Tarp-style rescue plan for its banks after Greece finally defaults, or that it may fall well short of the amount needed to kick the can further down the road again.
We should all remember that banks and countries are always ‘too big to fail’ until they do. History is full of examples of major bank failures and sovereign defaults. This is nothing new and it will not be different this time.
Standing back of shorting financial markets makes eminent good sense in this climate. The greater risk is getting caught up in a downward spiral than missing out on some modest dead-cat bounce in stocks. For when this blows you will not want to be long in any market.
3 Comments posted by readers:
I think the governments may have learned something from the result of the Lehman collapse. I believe they can put off the final collapse for longer than many people believe, maybe even a couple of years.
If it does collapse, it will be fascinating to see what precipitates the crash. Bank runs? Sovereign debt defaults? Dylan Ratigan (former moderator of CNBC’s ‘Fast Money’ TV show during the 2008 crisis) and some of his very bright friends, seem to think that swaps could ripple through the financial system and collapse it because they are so gigantic and secret. Kind of like AIG on steroids. Let’s hope we don’t find out, and that the Europeans realize that inflation beats another Great Depression. Dylan’s web site has some interesting pod casts on them. Rather scary though.
There is a persisting idea that we are two or so years away from armageddon. For example, Bill has just said that he thinks governments can put things off for two years. I think it’s MONTHS, not years!
The Editor implies it’s months not years when he writes “if the eurozone leaders walk away without a deal for their Christmas holidays, then we are in the final stages of the eurozone end-game”. This is not a matter of two years or of May 2013.
There is another reason why it’s NOW and not LATER. War is already under way within Iran with CIA and Israeli special forces on the ground. It’s covert at the moment, but it’s happening, and Iran has already called for a state of military alertness recently.
The oil price may rocket upwards above $200 dollars per barrel if Iran feels threatened enough in this covert war to block the Gulf of Humoz, and stop some or all of the 40% of the world’s oil shipment from getting out into the wider ocean.
What will a sudden rise in oil prices do to the eurozone, the US economy, the stock and bond markets? Devastating! Depression and a hyperinflationary leap.
This could happen at any moment. It’s not two years away. Israel and the US will not stop this covert demolition of Iran’s missile and nuclear development sites – no way – so that Iran will have to respond SOON.
BTW, Depression and inflation can go together, don’t you think, Bill? Can you not have a deflationary depression and also an inflationary depression? Not simultaneously, of course.
@ John Mark
I certainly no financial expert, but I think depressions are generally associated with deflation. I can remember living through double digit inflation which Volcker brought under control by raising interest rates until the economy slowed down enough to stop the wage-price spiral. I lived through that period, and while not pleasant, it was a picnic compared to the Great Depression with deflation. With global trade making cheap labor available to keep prices down with imports from developing countries, I can’t see inflation being a problem any time soon.
Deflation can be very dangerous. Once it gets going, it is difficult to stop. It becomes self-reinforcing, since debts get harder and harder to pay with less money. The Fed isn’t creating money with QE for nothing. They saw what happened during the Great Depression. The only thing that ended it was the ramp-up in military spending, and other government deficit spending, for WW II.
I doubt Iran wants to start a major war. They remember what Saddam did to them. And they need money from selling oil to pay for imported food and other goods. It is hard to conduct business with bombs raining down, and tank columns running all over the place. I will be surprised if they test a nuclear weapon, although it is impossible to prevent them from getting one, if they are determined to do so. I suspect they want to get close to one for ‘invasion insurance’, and possibly to enable a more aggressive foreign policy. I don’t see any country attacking Iran. They have a large, fairly well – trained army.
Europe could melt down, but I doubt that it will happen soon. When they see a collapse starting, they will do what the US did. That will do whatever is necessary to stop it, including money creation. The Germans know what a valuable separate German currency will do to their export economy. Wreck it. And China and the Oil States would be fools to sit by and watch Great Depression II start as the financial system disintegrates. That could go anywhere, and they know it.
As far as the USA, Obama will agree to major budget cuts next summer and that may well get him reelected. The gamblers are now betting he will be.
Gold will go up, but not as fast as it has during the recent past.
Ed Note: We are on the edge of the abyss and starring into it – money has left many euro banks, credit is freezing up and trade is being squeezed hard (-4% latest German figures)… it is not a question of when this will happen, it is already happening…