Another Global Meltdown Right Around the Corner?

Includes: ERO, IGOV, IYF, KBE, KRE
by: The Housing Time Bomb

Interesting day yesterday. The markets started off the day looking like they were heading off a cliff as the market tumbled over 250 points which took the Dow under 10,000.

Later in the day the banks rallied which then lifted the markets after Barney Frank's comments around derivatives:

But Mr. Frank's opposition to the derivatives spin-off proposal, which has been championed by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.), raises the chances that this provision will likely be altered or stripped out completely because Mr. Frank's comments on it were pointed.

"Banks ought to be able to hedge their own risks," Mr. Frank said. He said banks would be prohibited from overly risky derivatives activities by the Volcker Rule and that the separate provision wouldn't be necessary.

"I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else," Mr. Frank said.

My Take:

It looks like the bankers are going to win again when it comes to financial reform.

It appears that this legislation will lack the teeth needed to really clamp down on derivatives trancactions. I will hold my judgement until I see the bill, but I am guessing that the bankers got their way based on how the market turned around this afternoon.

In fact, I am sure Wall St. firms are already working on ways in which they can work around this financial reform. They are historically famous for finding ways to work around rules.

I still hold out hope that some of this legislation will at least rein them in a bit. Time will tell!

A weak financial reform bill is not good for taxpayers or the stock market. Confidence will not return to the markets as long as the banksters are allowed to run wild on Wall St. The SEC is still nowhere to be found and it looks like they will continue to be.

Where in the heck are the regulators? They still have not been able to figure out the cause for the flash crash. Is Wall St so out of control to the point where our government doesn't even understand how the market works anymore?

The fact that this 1000 point selloff and the ensuing rally a few minutes later remains a mystery scares the you-know-what out of me. Why would anyone want anything to do with stocks when no one can understand them?

The fact that Wall St tried to intitially blame it on a fat finger trade is embarrasing! Do they think we are that stupid? Apparently so.

Another Global Meltdown?

The market in my opinion is beginning to look a lot like 2008. We saw huge swings in both directions back then like we are now.

The market also ramped and sold off depending on various rumors and news just like currently.

The questions that we are asking about today's Greek debt crisis are remarkably similiar to the ones seen in 2008 that were asked by the subprime crisis. The only difference is the trigger:

  • Instead of asking is subprime contained we now ask is Greece contained.
  • Instead of asking will subprime's issues spread into other forms of mortgage debt we now ask will Greece's debt issues spread into other PIIGS debt.
  • Instead of aking which American bank will go under we now ask which European bank will go under.
  • Instead of asking how much "AAA" MBS do the banks own we now ask how much PIIGS debt do the banks own.

Eventually confidence was lost in 2008 when we realized that subprime was not "contained" and had been spread into almost all "AAA" debt. This then triggered a meltdown of our banking system ,and it almost brought down the whole financial system by the time we recognized the magnitude of the problem.

The Fed was able to stem the panic by passing the losses onto the taxpayers' balance sheet from the banking system's balance sheet. The problem isn't solved and the losses are still there. However, they don't have to be recognized. Eventually they will be forced to but that's another story for another day.

Can today's debt panic be stick saved like the last one?

This is the key question that needs to be asked and the problem is I don't think that it can.

The 2008 crisis was was triggered and then cleaned up by one country and one currency which of course was the USA.

The problem with today's Greek crisis is there are 16 different countries involved and one currency (euro) that cannot be manipulated. They cannot "print" out of their problems like we can.

This is why you continue to hear the word austerity over and over again in Europe. The only way out of this mess is by forcing the countries involved to slash spending and pay off the debt.

The problem is this isn't going to work because it's going to be extremely hard on the people that live in the PIIGS. The nations' taxpayers are the ones who are going to have to pay off the losses, and I don't think the political will is there to enforce the austerity.

We already know what the Greeks can do when it comes to riots and the austerity measures haven't even started yet!

There will be a lot of pressure on the PIIGS governments to leave the euro and "print" their way out of this versus living under extreme austerity measures for generations.

This puts the euro at risk and the reprocussions of such actions would be felt economically worldwide.

I expect to see a lot of violence once we realize how bad this European debt crisis actually is. Could this ultimately lead to wars? Absolutely, but that remains to be seen.

Just like subprime, this crisis isn't "contained," and it will likely trigger another global financial meltdown.

Disclosure: No new positions taken at the time of publication.