5 years ago this week Lehman Bros. collapsed and set off a chain reaction in the derivatives markets. I believed at the time that we were just hours away from a complete implosion of the financial system. It turns out that after the fact, if you believe what insiders have since related that this was true. We WERE literally hours away from the markets, banks and financial system not opening up that Monday morning. But…it all “worked out”…sort of. I say “sort of” because we had to “spend” a lot of ammunition to keep the boat afloat and the markets open.
So here we are 5 years later and where do we stand? You can listen to Washington or Wall Street and you will hear “it was a close call back in 2008 but we saved the day and are ‘growing’ now and the danger has passed.” Do you believe this? ANY of it? ARE we really growing? If so, would we have “grown” without the added (close to $10 trillion) fiscal and monetary blowouts?
My opinion for what it’s worth is that we have been bottom bouncing for 5 years and the only thing accomplished was halting the decline. I also believe that the danger level now is FAR greater than back in 2008. Don’t believe me if you don’t want to because I don’t have an Ivy League pedigree but instead listen to William White. Mr. White was the chief economist at the Bank for International Settlements. He believes that the “global credit excesses” are far worse now than pre Lehman.
The thing is we have already spent nearly every type and size of bullet available. If you recall 2009 and ’10 you will remember that nearly every week we would hear from Washington and Wall St. the “acronym” du jour. It started with TARP and ran through more than a dozen various plans and ended up with “QE” 1-4. …And here we are today with more debt, more derivatives, less unpledged collateral facing exactly the same problems…only bigger, MUCH BIGGER!
When the next crisis (a continuation of) hits, what can the response possibly be? Will the Fed crank QE up to $200 billion per month? Will we see Congress blackmailed into a $2 trillion “TARP 2” plan? Where is the ammo for the next bail out? The answer is that there is no ammo left. Just look at FDIC, they have something like $25 billion (with a little “b”) set aside to cover some $3 Trillion (with a very capital “T”) of deposits! How is this going to work? It won’t and we will see bank runs this time around to try to front run “bail ins” where depositors lose balances. Yes folks it is now different this time…it is worse, far worse because the same problems exist…only on a far larger scale.
One other point I’d like to make on how “different” today is compared to 5 years ago. Back then there were very few “willing” to go out on a limb and say (much less put in print) that what was happening had the ramifications of taking governments down with it. Now we hear from some much respected (and very mainstream) people on a daily basis that various treasuries and central banks WORLDWIDE and including the U.S. are…bankrupt and or insolvent. Why is it that there is far more commentary today that points to sovereign defaults than there was 5 years ago? Well, to put it bluntly it is because the situation is totally obvious AND by saying the obvious you are no longer considered a tin foil hat wearing whacko. 5 years after the fact…it is exactly “because” the financial situation is so similar to back then that the outcome will be different. The “tools” used did not work and are a moot point this time around…and everyone knows this.