This is the reason that TARP and the bailouts should never have happened. It just simply isn’t enough to prevent the inevitable-whenever that may be.
I sincerely hope you are wrong, for all of our sakes. The global economy and financial system remain under tremendous stress, but the scenario you describe is far from the most probable outcome. It is reasonable to expect that the Fed’s QE efforts will reflate loan collateral asset values and improve corporate cash flows to the degree necessary to improve loan performance and reduce the risk of corporate default. This will go a long way toward easing conerns regarding the interest rate swap and CDS markets, respectively.
After having accomplished the foregoing some sort of new equilibrium can be established that may be more sustainable if the world can mitigate the Chinese over-saving, over-accumulating dollar denominated asset problem. It would be better if wiser hands were on the tiller in Washington and Treasury, but we can’t do much about that. As odious as Geithner is, he is knowledgeable about the relevant issues and is not a bad guy to have calling the shots at this time.
I WISH I was wrong...sincerely wish....but do the math.
“So if you assume that only 1% of derivatives are “at risk” (odds are it’s more) and 10% of that “at risk” money is lost, you’ve wiped out nearly 1/3 of the banks’ equity.
If 2% of these derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out $400 billion or nearly HALF of the banks’ equity.
If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THESE BANKS’ EQUITY and they go to ZERO.
Remember, I’m only accounting for derivatives here… I’m not even including ON BALANCE sheet risks, mortgage backed securities, and all the other junk floating around.”
http://www.straightstocks.com/market-commentary/is-your-bank-a-failure-waiting-to-happen/
You cannot escape mathematical reality...as much as each of us desires. We’re embarking now on QE2...while the Fed may WANT to inflate...it doesn’t mean it can...especially as that requires co-operation from our creditors...which cannot happen. They will NOT cooperate with the debasement of their investment. In fact one of my personal concerns is that Congress represents our creditors’ concerns far more effectively than those of We the People. If that is true-I doubt any inflation is realistically possible.