Saturday, December 27, 2014

How Close Are We To A New Financial Meltdown? Ans. VERY

As too many Americans continue to be distracted by the bread and circuses of the modern corporo-media, some of us are looking seriously at the financial situation and whether, indeed, a repeat of the 2007-08 financial meltdown and recession may soon be upon us - possibly next year.

This isn't flighty crap like 'The Interview' and how idiots are "doing their patriotic duty" by watching that garbage (Can you also do your patriotic duty by eating dog shit  bearing the name 'Kim Jong-On'?) but rather a reality check that might be worthwhile for anyone with money stashed in 401ks.

Let's first look at some of the signs - which also preceded the earlier credit crisis:

- An inflated stock market well into bubble territory thanks to the Federal Reserve's continued cheap money infusions -via quantitative easing -  like crack to the Wall Street mob.

- Housing regulators have cut down payments to 3 percent in many cases, increasing the propensity for moderate to low income people to take out mortgages they may not be able to afford.

- A sub-prime loan enclave has materialized once more only now lodged in auto loans as opposed to home loans. The credit rating agency Standard and Poor's expects lenders to make no less than $21 billion in sub-prime auto loans this year, up from $20b last year and possibly as high as $23b next year.

- The last security backup, to protect against swaps (risky derivatives - used to 'bet the farm' by banks), was meanwhile removed by congress in the passage of a spending bill ending the last session.  Before this reckless move (by a Kansas Repug who stuck it into the bill at the last minute), Dodd-Frank regulations forced banks to separate their federally insured banks from their riskiest trading operations (which deal in derivatives). Now, they're all mixed together.

- Rising global debt imposes an added instability.  The Institute of International Finance, an industry research group, warned ten days ago that global debt (excluding debt held by banks), had reached a record 244 percent of worldwide economic output. This is now also propelled by the collapse in oil prices which means lenders won't receive payments from assorted oil operations that can no longer fund themselves and make good on their loans.

All the above in concert represent the perfect storm. All of them together create what is likely a 95% probability that the system will implode given one unforeseeable "X-event" (see the book by the same name, actually 'X-Events' - the chapters on financial catastrophe).

Yet, had the Wall Street gift amendment not been stuck into the spending bill, the probability might well be lower than 75 percent - given that despite the assorted instability agents, one still needed the swaps rule bailout to actually pose a serious systemic threat.

Incredibly, defenders of the amendment say they needed it to "preserve their ability to help farmers and businesses hedge their bets" - which is poppycock. The only remaining farmers of any note in this country today are the big agri-business farms, and the businesses which want to "hedge" their bets you don't want to know about. It's all a ruse to enable the banks to play with your hard earned money - bad enough when they're barely delivering 0.05% in typical passbook savings accounts.

Meanwhile, Thomas Hoenig, Vice-Chairman of the FDIC, has called the repeal "illogical", since the 2008 crisis "exposed the economic consequences of conducting derivatives trading in taxpayer-insured banks,"

One last heads up ought to scare the bejeezus out of any simpleton who feels extra -complacent: The so-called "too big to fail" banks that all needed a taxpayer bailout in 2008, now loom even larger than before the earlier crisis.  The nation's five biggest banks currently account for 44 percent of bank assets, up from 38 percent in 2007.

Einstein once defined insanity as doing the same thing over and over while expecting a different result. The banks are now set up, along with the nation - thanks to a reckless amendment - to test that definition to its limits at least in a first powerful iteration (there may be no resources left for later ones if this crash is as bad as I suspect).

And if you have money anywhere in the system, you had better be paying attention! In the words of Simon Johnson, Professor of global economics at MIT:

'We are on a very dangerous trajectory".

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