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Credit Crises II

Credit Crises II

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Published by XR500Final
Why the coming credit crisis is going to be MUCH worse than even possibly the great depression, an absolute must read for those who want to make preparations for the times to come..
Why the coming credit crisis is going to be MUCH worse than even possibly the great depression, an absolute must read for those who want to make preparations for the times to come..

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Published by: XR500Final on Aug 29, 2008
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Credit crisis II
 A world financial Armageddon? 
by Christopher Laird, PrudentSquirrel.com | Date, 2008
Where are we now in the credit crisis, and why isn’t the massive Fed and ECB weeklylending working to loosen interbank lending? Why is the credit crisis not really improving?Where is this going next? We describe what may happen next as Credit Crisis II in this article.Now that the credit crisis that started in 2007 is a year old, there has been a debate aboutwhether the financial system will recover, or will the Western/world financial system end uplike the Japanese financial system after the stock and real estate crashes in the 1990’s. In thatcase, the Japanese banks more or less carried their tremendous losses for ten years, and Japanentered a mild but painful decade of deflation. To this day, Japan is battling some of thedeflationary forces from that time.The question now becomes, will the Western financial system recover some normalcy, or arethings merely going to get worse and the world end up with a financial malaise lasting tenyears like Japan’s?If the second alternative is the case, then the central banks which are merely propping up thefinancial institutions with their ‘temporary’ lending will find they are taking the losses off thebanks hands, taking them on to their balance sheets, and effectively monetizing the losses.The ECB and the Fed are both hoping to find a way out of having to keep the bad assets theytook as collateral. They have lent hugely to financial institutions, taking their bad mortgagebonds, securities, derivatives as collateral. And at the same time, the financial institutions inquestion are carrying a sum total of $500 billion of losses on their books, the losses they admitso far, while estimates of ongoing losses from these bad assets runs well over $1 trillion. Ineffect, the Western credit industry is still crippled. Why is it so crippled still?Either the financial industry earns its way out (will take ten or more years) and drastically pullback credit, or they find enough new investors to pony up new capital infusions, perhapsthrough stock sales. And new such investors are becoming increasingly hard to find. Hence, thecentral banks are the only alternative.A theme now arises where it is becoming apparent that it is impossible to actually purge theescalating losses from the financial system, and that even big public bailouts don’t purge thelosses because of interlinkages between stocks, bonds and derivatives. If one class or institutionis bailed out, the losses of capital merely move to the other class. And the losses are clearly sohuge as of now, that they weigh on the currencies themselves and cause a fall in theirexchange rates.It is estimated that the USTreasury/Fed/FHLB has infused a total of $2 trillion and countingsince Aug 07 to the various credit infusions to the US financial system, and that the ECB is in atsimilar levels. And even after $ 4 trillion worth of infusions over the last year has been thrown
"Credit Crisis II" by Christopher Laird, FSU Editorial 08/25/2008http://www.financialsense.com/fsu/editorials/laird/2008/0825.html1 of 88/28/2008 9:35 PM
out by the Fed and ECB, the world credit/financial system is actually getting worse. What willbe the outcomes into 09?
Bankrupt en masse
In effect, this means the Western banks, etc are bankrupt en masse. The only thing proppingup the entire Western financial system, and its respective stock markets has been massive‘temporary’ lending, on an ongoing basis, by the Fed and ECB. Both central banks are beginningto balk at this situation. Even as they are starting to have second thoughts, the Westernfinancial institutions continue to borrow more money than ever on a weekly basis. Why aren’tthings loosening up?
Can’t stop or else
And, if the ECB or the Fed stops the emergency infusions, or even admit
the borrowersare, another round of collapsing banks/bank runs ensues as investors flee and pull their moneyout. In other words, the central banks have no choice but to continue the weekly $30-50 billionor so of infusions each for the Fed and the ECB, or else face a cascade of bank runs around theworld.…And each week the Fed and the ECB are effectively taking on another $30 or $50 billion of the bad assets from the various and sundry financial institutions scattered across the EU andthe US. So, week after grueling week, the Fed and the ECB keep adding another $50 to $100billion of bad assets to their balance sheets, as ‘collateral’ and making ‘temporary’ loans theykeep having to roll over and extend the repayment on. Ie, the junk stuff is becoming apermanent resident on the central bank’s balance sheets. If either the Fed or the ECB stop theweekly infusions, quite possibly the entire Western financial system stops dead. And we get amassive world stock crash.The question now becomes, what happens when these two central banks finally decide theyhave to let go? You are not going to tell me they are going to keep infusing a combined $50 to$100 billion worth of financial bailouts each week forever? This massive temporary lendingcertainly has to end at some point.And even with all this new money every week, the credit system is barely functional anywayright now. And this half dead world credit system is dragging economies downward, as there isless and less and less credit. This is a paltry return for all the bailouts and massive temporarylending.Probably what is happening is that this is a classic case of a parabolic world credit peak, asmore and more money is needed each week merely to keep the bubble from collapsing. Andthe
only ones
left to infuse this money are the central banks. No one else is willing to step in.Financial institutions won’t lend to each other, and investors won’t recapitalize the crippledbanks. As financial institution’s stocks fall, issuing new stock becomes prohibitively expensive.
Parabolic peak
One could say all that is happening is that all financial institutions in the world don’t really trusteach other, and won’t lend to each other. And that an astounding $50 to $100 billion of weeklyinfusions from the Fed and the ECB is not fixing the situation, and that we are witnessing thefinal parabolic peak of the world credit bubble that has built up for the 63 years after WW2ended. That, and the end of the USD and Yen driven credit/asset/finance bubble which ensuedfrom the early 1970’s.So, before we continue, it might be said that the present development of the credit crisis, fromAugust 07 to now, is Credit Crisis I. And the present state of affairs is that the Fed and the ECBhave to infuse a weekly $50-100 billion plus into their respective financial regions merely to
"Credit Crisis II" by Christopher Laird, FSU Editorial 08/25/2008http://www.financialsense.com/fsu/editorials/laird/2008/0825.html2 of 88/28/2008 9:35 PM
prevent a world finance implosion.I also have noticed that the Credit Crisis I has had a one year periodicity of major newdevelopments, ie that if one major sector had a problem on a given month, that the next yearthe same sector seems to reinvent a new worse manifestation.I made a graphic to describe the general situation:So, when the central banks stop this massive weekly lending, what happens? Massive forceddeleveraging and probably world financial Armageddon. This would be Credit Crisis II, or PhaseII. We will look into Credit Crisis II in a moment.This is the conclusion we came to here at PrudentSquirrel, trying to ascertain where we are inthe big picture on the Credit Crisis now. It is that the Central Banks are desperately trying tostave off Credit Crisis II, and they are losing, and probably knowing this, they will at some pointconfer together and pick a time to let the credit system implode, and try to weather thestock/financial crashes that will occur at that time. Likely, some currencies can collapse as well,and a great deal of FX (foreign exchange) chaos and restrictions will ensue for several years
"Credit Crisis II" by Christopher Laird, FSU Editorial 08/25/2008http://www.financialsense.com/fsu/editorials/laird/2008/0825.html3 of 88/28/2008 9:35 PM

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