Skip to comments.“The Sequel”: How 2011 Is A Repeat of 2008—Only Bigger, Longer, and Uncut by Bailouts
Posted on 08/15/2011 2:28:21 PM PDT by SeekAndFind
I might have missed it, but I dont think anyone has noticed this simple truism:
The structural causes that led to the Global Financial Crisis of 2008 are identical to the structural causes that are leading us to another systemic financial crisis in 2011.
The only difference is the kind of debt at the core of the looming crisis: Mortgage-backed securities in 2008, as opposed to European sovereign debt in 2011.
And of course, the debt hole in 2011 is bigger than in 2008a lot bigger.
Thats why I am confident in predicting we are about to have another Global Financial CrisisIm calling it The Sequel: Same movie, same players, same story. Only this time aroundlike all good sequelsthe financial crisis we are about to experience is going to be bigger, longer, and uncut by bailouts.
By the way, that is the key difference between 2008 and 2011: Were not going to have a Hollywood Ending this time around. The governments of Europe and the United States, as well as their respective central banks, do not have any weapons to fight off this 2011 financial crisis, as they did in 2008, for the simple reason that they used them all uptheyre out of bullets, both monetarily and politically.
So when The Sequel hits the big screen, there wont be a Big Daddy Government deus ex machina to come save the day in the third act twist. When The Sequel hits, were on our own.
Lets discuss the structural similarities between the original and The Sequel:
In both 2008 and now 2011, you had unpayable debts at the center of a fragile financial system. In 2008, it was mortgage backed securities and collateralized debt obligationsthe so-called toxic assets. I think we all know that story pretty well.
In 2011, we have European sovereign debt. And just like the toxic assets of 2008, the Euro-bonds might have been rated AAA, but they certainly arent blue-chipthey are more like brown-chip: That deep brown color peculiar to fast-sinking dog-turds.
In both 2008 and 2011, these unpayable debtsemitted over many years, accumulating silently and asymptomatically like plaque in the arteriesgave a false sense of prosperity in the years leading up to the respective crises.
In the lead up to 2008, the MBSs and CDOs gave the American homeowner a sense that their house was their personal private ATM sitting on their quarter-acre suburban lot. They also were a profit spigot for the financial sector, which bouyed the U.S. GDP growth, leading to a false sense of national prosperity, even as there were signs that the non-financial sector of the economy was diving.
In the lead up to 2011, on the other hand, the sovereign debt of the eurozone countries gave the European citizens a sense that they could afford to buy all the imported goods they could ever want, as well as the sense that their government could afford to pay for all the social welfare programs they were all promisedwithout having to pay for any of this by way of higher taxes. Hell, that was the entire Labour governments platform between 1997 and 2010: Blair and Brown gave the UK a welfare state and low taxesall paid for with sovereign debt.
In both 2008 and 2011, you have banks exposed to these bad debts both directly and indirectlyand this exposure in 2011 threatens to topple the entire financial structure, just as it almost did in 2008.
In 2008, the financial institutions with direct exposure to the toxic assetsthat is, the institutions that actually owned these crap bonds that would never be paid in fullwere mostly American banks. Their capitalization depended on how pristine these toxic assets were. As it became increasingly clear that the toxic assets were exactly thattoxicthe banks holding this crap found themselves not only without the capitalization to pass regulatory muster, but in fact found themselves functionally insolventhence the suspension of FASB 157, coupled with the injection of $150 billion worth of capital by way of TARP.
In 2011, the financial institutions with direct exposure to toxic assetsin this case, the European sovereign bonds, especially from the PIIGSare once again banks, this time around mostly European banks: UniCredit, Société Générale, Dexia.
Like 2008, these assets might be rated triple-A, but theyre dog-turdsand they threaten these banks with insolvency, if any of them default. A bankruptcy of any of the aforementioned European banks would have massive consequences for the rest of the global financial constructit would not be a Europe-only problem, just as the bankruptcy of Lehman was most definitely not an America-only catastrophe.
And thats just the direct exposure to the 2011 version of toxic assets.
The real danger in 2011 is the indirect exposurethat is, the liabilities that are triggered in the case of a debt default: Just like 2008.
In 2008, it was AIG and other assorted credit default swap sellers that got hit bad, when the toxic assets began to defaultwe all remember how the very ground we trod rocked as AIG stumbled and everybody had a collective nuclear-meltdown freak-out.
In 2011you guessed itits worse: We have Bank of America for sure has massive exposure to derivatives on European sovereign and debt, as well as . . . God Knows who else.
Why do I say God Knows who else? Because just like in 2008, the derivatives market is so opaquenot to say hermeticthat we are not going to know whos going to go bust until it actually happens. In 2008, Hank Paulson and the Treasury Department didnt find out about the AIG hole until the weekend before the company would go bust. Today, in 2011even with the experience of how potentially deadly ignorance of the derivatives markets can bethere are no mechanisms in place to swiftly and accurately tally who has derivatives exposure to any particular bond or asset.
In other words, Tiny Timmy and Bailout Benny never implemented the one lesson learned from 2008: Make the markets transparent, so that you can see where the crisis is coming from before it falls on top of your head.
Thus theyand we collectivelyare flying blind insofar as derivatives written on the European sovereign debt. We only know about BofAs massive CDS exposure indirectly, through Timothy Geithners demand in December 2010 that Ireland not default, because of the massive losses an Irish sovereign default on BofA.
Bernanke and Geithner had the chance to regulate this vital piece of the financial marketsbut they didnt! Instead, they acquiesced to this ridiculous pseudo-ideology that we should not regulate the financial markets.
(Parenthetically, and speaking as a hard-core, anti-choice, anti-vegan, pro-gun, pro-red meat Conservative: I am sick and tired of the ignorant assholes who say, All government regulation is bad! Let the free markets reign! We have the government regulate various industries and products because it is necessary for our individual and collective safetyor would you rather the government never regulated, say, the water supply, car safety standards, housing standards? Would you prefer it if the FDIC ceased to exist, and your local S&L could go to Vegas and play the roulette wheel with your life savings? Certainly not. Not only do we need government regulation for safety standards, we need regulations to prevent unscrupulous exploiters from gaming the systemthink Enron, which should have put paid to any ridiculous notion that the market knows best, but obviously hasnt (or else I wouldnt be ranting here): The Enronites of the energy trading desks exploited the free markets and the lack of government regulation in the so-called energy markets, and deliberately created rolling blackouts in California so as to gouge the people of that state for the electricity they already owned and which they should have been getting, but which the Enron bastards were manipulating in order to squeeze them for money. Insofar as the financial markets are concerned, anyone spouting that particular bullshit spiel about the markets knowing best is either a shill for the banks, or a complete and utter imbecile. And a bank shill at least has the excuse of needing to pay the mortgage in exchange for spouting this nonsensical bullshitthe imbecile does not.)
Now, I used to write for the moviesI can tell you the secret to writing a good sequel: Use the exact same elements, the exact same story structurehell, even use the exact same lines!but make sure the sequel is bigger: Bigger sets, bigger explosions, bigger stars, bigger everythinga bigger bang for the buck.
2011s The Sequel is certainly going to deliver that bigger bangbecause its a lot bigger than 2008: The total sovereign debt of the PIIGS is about 3.1 trillion. Thats 20% of the eurozones GDPjust the PIIGS, just those five, forget about France, Belgium and the UK, which if added up easily doubles that 3.1 trillion figure.
Compare that to 2008, when the total toxic assets the Federal Reserve wound up having to buy amounted to about $1.5 trillionabout 11.5% of the U.S.s 2008 GDP.
In other words, the current situation is over twice what 2008 wasand might wind up being four times the 2008 price tag. And thats just the nominal value of the toxic debt at the core of the current situation. We have no idea what the total value of the indirect exposure via derivatives is going to add up to.
So! Weve seen that were structurally at the same place we were in 2008: Unpayable debts held by a fragile financial sector, with massive indirect exposure by way of derivatives that no one has bothered to tally up and regulate.
We have furthermore seen thatlike all good sequels2011 is going to have a bigger bang: We currently have more debts on deck than in 2008, at least twice as much, as a matter of fact.
Question: Why does teasing out these similarities matter?
Answer: Because it will allow us to see what will happen over the months of September and October, when the crisis breaks.
What weve seen over the last couple of weeks is not the crisisor not the crisis, at any rate. Weve seen Italian and Spanish debt drop, their yields spikingweve seen gold run up to $1,820weve seen the biggest drops in the US equities markets since 2008
but these gyrations are not The Sequel. Rather, these last couple of weeks of market gyrations have been the forewarningsthe pre-tremors. Anyone whos lived in earthquake country knows about them: The little tremors and hiccoughs that precede The Big One.
The Sequel will actually get going once we have our Lehman-like event.
In 2008, the bankruptcy of Lehman Brothers triggered the crashbut it was not the cause of the Global Financial Crisis of 2008: The structural weaknesses were already baked into the situationthe Lehman bankruptcy was just the shove the global financial system needed to fall off the proverbial cliff.
Today, we are waiting for the Lehman-like event. My personal guess is Dexia will be the first to go under, the Lehman-like event that will trigger The Sequelbut thats just a guess. More likely than not, the Lehman-like event of 2011 will catch us all by surprisebut just like the Lehman bankruptcy, it wont matter intrinsically: Itll only matter insofar as it triggers the cascade of panic-default-bankruptcies, etc.
Be that as it may, at my paid site, The Strategic Planning Group, weve been discussing what to do, when The Sequel hits. I wont bother recapitulating what Ive written therefrankly, its too long, and besides, the details are why the SPG Members pay their dues.
The one issue I will discuss here is the notion of a safe haven:
In 2008, when all the stock markets were going south, and all the name-brand banks were teetering, where did everyone park their money? What was the safe haven?
Treasury bonds. In fact, the flight to safety was so massive that Treasuries reached negative yields, when you factored for inflation.
Treasuries are the traditional American safe haven. But what with the recent spate of, er, questionable events (Debt celing conniption fit, anyone?), Treasuries arent looking as safe as they used to, nevermind the (cosmetic) S&P downgrade of their Treasuries rating.
But this isnt an American crisisthis is a European crisis that will have catastrophic consequences in Americabut the epicenter will be Europe.
Whats the safe haven in Europe? Gold.
In fact, in Europe, sovereign bonds have never been considered a safe haven, for the simple reason that sovereign debt in Europe has countless times suffered haircuts, defaults, outright national bankruptcies.
Since this will be a European sovereign debt crisis that will spread around the globebut the epicenter of which will of course be in Europebankers and asset managers will pull their casheurosout of whatever they think is risky, and park it in some safe haven.
These European money men obviously cannot sell their assets and buy US Treasury bonds with those euros that they get. And they certainly wont plug those euros into European sovereign debt, which is exactly the source of the panic. They wont even park those euros in German bunds, for fear of contagion.
Therefore, it is reasonable to infer that, if and when there is a Lehman-like event in Europe that triggers The Sequel, the flight to safety will be to gold, which Europeans traditionally see as a financial refuge as surely as Americans consider Treasuries their financial refuge.
Hence in my estimation, gold will rocket on. I would not be surprised if gold crosses $2,000 an ounce when the Lehman-like event happens, and goes on quickly to $2,500 before the end of the year. On my scale of augury, this is head-and-shoulders above a Strong Hunch, just shy of a Fearless Prediction: $2,500 by the New Years. After that?
Yup, things are going to get bad and this time we cant afford to bail anyone out. I guess solving a debt crisis with more debt wasnt such a good idea?
Good thing our President and his crack team are in their armoured bus solving our problems. Lol! Word is he is going to put the bus in a ditch just to show people how hard it is to get out of one.
“Our president and his CRACK TEAM”...hee hee
Everthing he says is true. All that has happened is the monster from the first movie is back in the second, only this go around it’s bigger, faster, and angrier, and it’s intended victims are essentially down to nothing available to stop it.
I think it might be time to head to that farm I know my family is welcome to live at.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.