Just a day before the next Lehman-style collapse?
Posted on 01 December 2011 with 5 comments from readers
The last time the Fed organized a global financial market reflation using dollar swaps on the scale it did this week was on September 20th 2008 just two days before the final collapse of Lehman Brothers when its Chapter 11 bankruptcy fell apart.
There is therefore a sense of deja-vu all over again about the Fed’s coordinated bailout of the eurozone on Wednesday. We just wonder who will go under on Friday?
Big fish
Market speculation yesterday was that the action came because a French bank was about to become insolvent. Yet we did not get this sort of move before Dexia or MF Global collapsed recently so the guessing must be that this is something bigger. Is this Greece about to finally default?
Do you buy shares on this news on the assumption that everything is now well in the eurozone garden? That would surely be utter madness as nothing fundamental has changed except that the central banks of the world have just told us that they are panicking. Going short would be the only logical market move.
Could flooding the system with money work? Well it did not save Lehman or the financial markets from the epic crash that followed in the fall of 2008. Gold and silver also took a pummelling.
Only a far bigger bailout that needed congressional authorization saved the day. And then it would not be churlish to point out that the eurozone crisis of today is the direct consequence of that reflation of the global economy with banks choosing to buy government debt with that cheap money.
European banks then loaded up on ‘ultra-safe’ euro-denominated bonds of various governments. The problem is that those bonds have collapsed in value leaving the bank’s capital destroyed and that is why many are on the verge of bankruptcy and about to fail.
2008 all over again
So following the 2008 precedent what comes next is the big crash and then the eurozone authorities finally get their act together. The central banks have done their duty this week in trying everything to avert a tragedy.
And to be fair the banking system will now be better able to absorb the immediate shock of whatever happens next. But that will not stop it happening.
Will the eurozone then be able to get its act together like the Fed and US Treasury in 2009 and kick this can further down the road or is this it with a global depression as a consequence? These are serious times indeed.
5 Comments posted by readers:
Once again, Ed., you’ve given us a spin of understanding of great importance that I’ve not found elsewhere. To tell us that this central bank action happened just two days before Lehman collapsed is sensational news and, for me, tremendously exciting.
I just hope that my honeymooning daughter can get home from continental Europe without a banking collapse, queues at airports and rioting behaviour when ATMs fail to operate.
You still see Depression as something yet to come, according to your last paragraph. My view is that Europe and the US and other countries are already in Depression and have been for some years now.
What a Lehman collapse would do, I expect, is to make what it is perceived by a few, namely that we are already in Depression and that all the GDP figures are phoney, seen in bright light by the majority.
Then, we might give up this tiptoeing around the word Depression by using its less worrisome relative Recession.
All of my research has pointed towards a global banking and/or currency ‘event’ taking place during the western holiday period that is Christmas and new Year.
However, the coordinated global action of central banks yesterday caught me by surprise. It would appear that the crisis is much worse than I had anticipated and that the PTB are having trouble keeping this thing together. An ‘event’ outside of a holiday period will lead to even greater social unrest and economic damage.
If this action has not triggered bank runs by those who can see what is developing I will be very surprised.
GS and the buddies ( B of Canada ~ Draghi~Wsh DC etc) are pushing the trillion worthless CDS onto the taxpayers. Ho Hum. Its a bad week for all the turkeys.
No way Germany and France will let the euro collapse. They are designing sanction laws to punish their over spending European neighbors right now.They can kick the can down the road with money from the USA for at least a few more months, until they can get the laws they need passed. That will be as hard as getting rid of the heads of Greece and Italy. Not too difficult, was it?
After that, Germany will be calling the shots throughout Europe with little brother France standing behind them. Germania will live at last!
Watch out for a deflationary collapse eventually, but it could take a year or two.
With all the politics involved, it is impossible to predict how this thing will play out. You can’t trust any of them. They take their orders from the billionaires that gather on the islands in complete secrecy.
Bill, I agree that there’s no way that Germany and France want the euro to collapse, but there may be no way they can stop the markets forcing it to collapse.
So, if you think that the euro will not, never, collapse just because Germany and France do not want this to happen, then I think you are forgetting the enormous power of the markets to force on the politicians things that the politicians do not want to happen.
However, I agree with you, paradoxically, in that I believe that the euro is primarily a political concept, so that the continental Europeans will continue with it for reasons of political unity, even if the eurozone consists of just two countries, say, Germany and the Netherlands.
To keep that historically war-mongering German nation tethered by the euro to just one other country is better than having it run around dangerously on the Deutche-mark.
If the euro ends up as the currency of just two or three nations, will the euro have failed or not? If Germany is one of those countries, then I consider that the euro will not have failed but will still be functioning usefully as a muzzle over the mouth of the German eagle.