Haven’t we been here before?
One of the strangest aspects of history is that it not only repeats itself but that the repeats often come in rapid succession. Today, the entire financial world is repeating the 2008 debacle on a sovereign basis and few if any commentators seem to sense it.
In 2008, the financial world was first rocked by the Bear Stearns crisis. True we’d already seen some major volatility in the credit markets since the Summer of 2007, but Bear Stearns was the first sign that something MAJOR was happening.
Despite the clear implications of this collapse (that investment banks along with the entire financial system were in BIG trouble) most commentators shrugged the issue off. In fact, the financial headlines for the Spring of 2008 largely consisted of every Wall Street CEO on the planet publicly stating, “the worst is over.” Most commentators bought into this and proclaimed Bear Stearns would be an isolated event.
Then we had Hank Paulson’s “Blank Check Bazooka” for Fannie and Freddie in July 2008. As you no doubt recall, Paulson told Congress that if he had a “blank check” to bailout Frannie, the mortgage market would stay afloat because “if everyone knows you have a bazooka in your pocket, you won’t have to use it.” (I’m paraphrasing).
Given the level of this intervention (combined these two firms accounted for roughly half of the US mortgage market) the Blank Check Bazooka was a wake up call for the general populace that the worst was NOT over and that things were starting to get REALLY messy in the financial system.
Then came September 2008, when everything came unhinged in a matter of weeks. Various financial firms that had been in business for decades vanished overnight (Merrill Lynch, Morgan Stanley, Wachovia) being merged with larger entities. And the entire financial system teetered on the brink of outright failure.
So what can we glean from this Crisis and the psychology surrounding it? Well, we can see that Systemic Crises follow a clear pattern when it comes to social psychology and how people react. That pattern is:
- A minor player goes under and people shrug it off for a few months
- A larger issue arises requiring a vast sum of money and people begin catching on that something LARGER is at stake
- Suddenly everything comes unhinged and the entire world panics
Today, no more than two years after this debacle, we are witnessing the EXACT same pattern play out on a sovereign basis.
For starters, Greece is the Bear Stearns issue: a minor player (its GDP is that of Massachusetts). And just as Bear Stearns was swallowed up by JP Morgan (JPM), permitting the financial system and stock market to remain afloat for a few months, Greece has been largely swallowed up by the European Central Bank and IMF’s interventions.
The “Blank Check Bazooka” issue this time around was the European Central Bank’s $1 trillion bailout in June. Just like Paulson’s Bazooka, the plan was rushed and poorly organized. And just like Paulson’s Bazooka it has failed, accomplishing nothing but maintaining the illusion that the financial system in Europe is OK, when, in point of fact, it’s as busted as the US mortgage market was in July 2008.
Which brings us to today.
Thus we have already seen a minor player collapse (Greece) as well as a major issue (the European banking system) require massive intervention to remain afloat.
What comes next? The systemic collapse/ open panic. The only difference between 2008 and this year is that this time around the Crisis will be sovereign in nature.
We’re not quite there yet, but given that my Crash indicator is on and we’ve received two confirmed Hindenburg omens, we’re heading there sooner rather than later. This Crisis will likely begin with the Euro breaking down again to new lows, but will eventually spread to the Yen and ultimately the US Dollar.
I cannot predict the speed or precisely how bad things will get, but if toxic debt on Wall Street’s balance sheets nearly took us under in the Fall 2008, you can imagine what it will be like when the US’s balance sheet is the primary issue.