Wednesday, September 17, 2008

9/17/2008: The Wheels Came Off the Wagon

Nine months ago I told my listeners on WEBY AM-1330's Your Turn program to immediately begin preparing their personal finances for a crisis not seen since The Great Depression.

Just as there was day when the world looked back and marked it as the beginning of the depression, today will be the day the world looks back and marks what well may turn into The Great Depression II.

I will post analysis by myself and others in the next few days. Right now, I am posting articles from primarily British sources because American journalism is hopelessly skewed by the presidential election. In general, I don't trust the first-tier news organizations because they are prostituting themselves for Obama. The unconscionable treatment of Sarah Palin shows that their commitment to so-called feminism consists only of women who wear pants, drink hard, curse profusely, and swing AC/DC.

On that thought, this is the second time a highly qualified woman has been trashed by the so-called Main Stream Media (MSM) because she was not part of the Eastern liberal media mafia. I'll comment on that in a later post.

Back to The Great Depression II:

This article from the Financial Times of London tells the story; the banks are in crisis because of the outrageous lies told about the stability of Lehman Bros. and AIG. They don't believe anything coming out of the mouths of anyone in America's financial leadership or governmental agencies.

But there is a much more sinister aspect to all this; I have been telling listeners and readers for about the last 18 months, America is bankrupt. The idea that the Federal Reserve, or the American Treasury, can just wave its hand and tell the world that no matter what the number of dollars needed, the US can cover it, are over.

Worse, is the ignorance of the American public to the reality that the Federal Reserve is a bank; it can go bankrupt just like any other bank. The wholesale looting of the Fed by the NY City banking mob has reached a point where no one with the education about the American system's realities can continue to believe the Fed's promises to come up with the cash it is promising to stave off a worldwide financial collapse.

This is not 1929 in this critical aspect: The Federal Reserves' chairman is a respected student of The Great Depression. He has a reasonable belief that it could have been avoided had the Fed come up with enough dollars to ensure the liquidity of the system.

The difference in this crisis is that America is not the one unscathed victor of a world war. America is not dealing with the wholesale destruction of its factories, cities, and human spirit.

And most importantly, America is not alone as it was in 1929 as the world's solo player at the top of the world's financial game. This time, America is very limited by the reality that the Arabs, the Red Chinese, and the Koreans, are now powerful players in the world economy in their own right; they are where America went searching for money to float Merrill Lynch, Lehman Bros., and AIG.

And this time they said "No."

The result of their decision? The key phrase in the story below is, "Lending between banks, in effect, stopped."

Read on:

Panic grips credit markets

By Krishna Guha in Washington, Michael Mackenzie in New York
and Gillian Tett in London

Published: September 17 2008

The panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the second world war.

Barometers of financial stress hit record peaks across the world. Yields on short-term US Treasuries hit their lowest level since the London Blitz, while gold had its biggest one-day gain ever in dollar terms. Lending between banks, in effect, stopped.

Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn or might further expand its market liquidity operations.

The $85bn emergency Fed loan for the troubled insurance group AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety.

One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or “broke the buck” – owing to losses on debt in Lehman Brothers, which filed for bankruptcy protection on Monday. This raised the risk that retail investors in other such funds could panic and pull out their money.

All thought of profit was abandoned as traders piled in to the safety of short-term Treasuries, with the yield on three-month bills falling as low as 0.02 per cent – rates that characterised the “lost decade” in Japan. The last time US Treasuries were this low was January 1941.

Shares in the two largest independent US investment banks left standing – Morgan Stanley and Goldman Sachs – fell 24 per cent and 14 per cent, respectively, as the cost of insuring their debt soared, threatening their ability to finance themselves .

Morgan Stanley was holding preliminary merger talks with Wachovia, a troubled regional lender, and could approach other banks and look at other options in the coming days, people familiar with the situation said. Washington Mutual, another regional lender, has hired Goldman Sachs to contact potential buyers.

HBOS, a leading UK mortgage lender pressed into sales talks by the government after its share price halved this week, agreed to a £12bn takeover by Lloyds TSB.

A key measure of fear in the fixed-income markets - the so-called Ted spread, which tracks the difference between three-month Libor and Treasury bill rates - moved above 3 per cent, higher than the record close after the Black Monday stock market crash of 1987.

US authorities fired back with the Treasury announcing it was borrowing $40bn to give to the Fed to use for its emergency lending – in essence removing balance sheet constraints on the size of this assistance.

The Securities and Exchange Commission announced new curbs on short selling.
Some analysts have criticised US authorities for adopting an arbitrary approach to rescues - saving AIG, but not Lehman - that was impossible for investors to predict and therefore did not boost confidence.

The S&P 500 fell 4.7 per cent, led by a 8.9 per cent slump in financials. Equity volatility was near its highest level since March. The dollar fell against other major currencies.
Gold benefited from safe-haven buying, with prices rising 11.2 per cent to a three-week high of $866.47 a troy ounce.

Andrew Brenner, co-head of structured products and emerging markets at MF Global, said: “It feels like no one wants to take anyone’s feels like we are on a precipice.”

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