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
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.
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