Posted on 01 December 2011 with 4 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?
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.
Such logical steps in an organized manner with well-developed algorithms have been used to create software systems that are completely automatic for trading in cryptocurrencies. It is relatively new to understand and use. But, this is the fact. Check that clearly in the official website of the many options that are available.
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.