World Faces Greatest Economic Crisis Ever

[JimBowie1958]

An entire system of global trade is at risk - Telegraph

If it has been obvious for some time that we are caught up in an extreme financial crisis, the extent of its severity has acquired greater clarity in being described by the Governor of the Bank of England. Never before has the global financial system been so interlinked and integrated, which means that problems in one part of the world are capable of causing severe stress almost everywhere else. We once more face a perfect storm of cascading default, contracting credit and collapsing economic activity...

It is, first, essential that confidence in the eurozone’s banking system be restored through recapitalisation of its banks, where necessary with public money. This would help bring a halt to the destructive downward cycle in credit.

Politically unpalatable though it would be, Britain may have to stand ready to participate in the process by similarly supporting its own banks. To once more dip into our pockets to bail out the bankers, at a time of deep public spending cuts and swingeing tax increases, will to most people be anathema. And for UK banks, it may not be strictly necessary – the Chancellor, George Osborne, insisted yesterday that they were well capitalised and liquid.

Yet, like it or not, we remain joined at the hip to Europe. This is especially the case through the banking system, which is highly exposed to the eurozone’s inner tortures. If a plan of mass recapitalisation is to work, it has to include everyone, good as well as bad. For countries and bankers to start squabbling among themselves about who needs to be bailed out and who doesn’t merely risks accentuating the paralysis...

But in the end, none of these measures can be any more than sticking-plaster solutions. Until the imbalances between creditor and debtor nations in the eurozone and the wider world economy are addressed, it is only a matter of time – and possibly not much time at all – before the crisis returns anew. It is therefore to be hoped that the G20 summit in Cannes next month can come up with some form of global contract that goes beyond the meaningless commitments and rhetoric of the past to provide convincing mechanisms for addressing such imbalances and strains once and for all.

At risk is a system of global trade and interaction unparalleled in human history – one that has lifted hundreds of millions out of poverty and delivered unprecedented prosperity to hundreds of millions more. Will this really be thrown away for want of resolve?

This guy just doesnt get it. Recapitalization wont work because the root problem to this whole thing is the collapse of mortgage debt related securities and their amplified impact through the use of CDS. This is ine effect an exponentially growing problem that started with Greek banks being threatened with bankruptcy so the Greek government bailed them out. Then the Greek government was put in the red by the growing debt, and so they went to the EMU for a bailout. Now the EMU wants a bailout from the G7, then the G20 with the IMF as a backstop. These idiots dont understand what Einstein said was the most powerful force in the universe; exponential growth.

So the choice is either to 1) bail out the banks over and over till every government on the planet is out of money. And then everything collapses, or 2) Let the banks fail, have the government step in and act in the void they leave until other banks can organize to step in in place of the big banks that failed.

Europe and the US have been doing 1) with failing results, kicking the can down the road and stealing the wealth from everyone else by eroding the value of the US dollar. But eventually this will collapse through either hyper-inflation from the government running the monetary digital creation apps 24/7 or massive deflation if the government does not attempt to massively soak the world in fiat currency. The 'sweet spot' where it can hit a happy median with neither hyperinflation nor deflation does not exist except int he minds of Keynesians.

Iceland took option 2), let the banks take their lumps and now their economy is growing strong all on its own.

When will we wake up and choose door number 2?

 

[expat_panama]

...the choice is either to 1) bail out the banks over and over till every government on the planet is out of money. And then everything collapses, or 2) Let the banks fail, have the government step in and act in the void they leave until other banks can organize...

Another choice in 2008 was to issue money for collateralized loans to be paid back with interest. That's what was done with TARP and any 'bail-out' was private business' paying back all the loans plus interest. Recapitalization isn't being done now because deflation is no longer a threat. What's being done now is tax'n'spending plus over regulation. It's a real bad idea.

 

[JimBowie1958]

...the choice is either to 1) bail out the banks over and over till every government on the planet is out of money. And then everything collapses, or 2) Let the banks fail, have the government step in and act in the void they leave until other banks can organize...

Another choice in 2008 was to issue money for collateralized loans to be paid back with interest. That's what was done with TARP and any 'bail-out' was private business' paying back all the loans plus interest. Recapitalization isn't being done now because deflation is no longer a threat. What's being done now is tax'n'spending plus over regulation. It's a real bad idea.

Troubled Asset Relief Program - Wikipedia, the free encyclopedia

While it was once feared the government would be holding companies like GM, AIG and Citigroup for several years, those companies are preparing to buy back the Treasury's stake and emerge from TARP within a year.[4] Of the $245 billion invested in U.S. banks, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010. AIG is considered "on track" to pay back $51 billion from divestitures of two units and another $32 billion in securities.[4] In March 2010, GM repaid more than $2 billion to the U.S. and Canadian governments and on April 21, GM announced the entire loan portion of the U.S. and Canadian governments' investments had been paid back in full, with interest, for a total of $8.1 billion.

While much of the loans have been paid back, it does not appear that all the 'invested' money has been paid back.

And there is still a large threat from deflation.

http://www.marketoracle.co.uk/Article30687.html

"I think [the 3-year Treasury bond yield] might go back to 2.5%. That's where it was at the end of 2008 in the aftermath of the Lehman Brothers meltdown. That's my target for now. I think we are looking at deflation. As I said back then, I think that will be the media chatter by the end of the year. Plus, the weakening economy here and abroad. The long bond, the 30-year Treasury, is the ultimate safe haven in the world."

"In my new book, I identify seven different types of deflation. Now five of those are already in place -- we're having financial asset deflation, tangible asset deflation, commodities are coming down, wages are coming down. The one that hasn't kicked in yet is goods and services deflation. The point is that the whole world is really marking down assets. It's marking down the whole spectrum. I don't think goods and services are going to hold up in terms of inflation. I think that will move to deflation fairly soon."

"In effect, [the Fed] tried to do that with QE2. Because you remember at the time they were worried about deflation... That was one of the objectives. Of course, they spurred commodities, they spurred stocks and they got a temporary offset. But I think the forces of deleveraging in the world are greater than the Fed can handle. We're marking things down to equilibrium. Look at government sovereign debts around the world. They're much greater than taxpayers can handle. You either have to mark them down or get somebody else to handle them, like the Germans, or try to inflate them away. Inflating away is an excess supply world is almost impossible, even for the Fed."

Deflation Has Arrived - Forbes.com

Can Global Stimulus Stop Deflation? | Clif Droke | FINANCIAL SENSE

 

[expat_panama]

...it does not appear that all the 'invested' money has been paid back...

It 'appears' that way to some and not to others. Some prefer reading Wikipedia's rehash of pundits take on what the Fed says, and others just read what the Fed says. Their timeline for TARP and other programs is at http://timeline.stlouisfed.org/pdf/CrisisTimeline.pdf and the argument over how much is still outstanding can depend on which accounting method's used and what's accepted as proof. Here's the NYT's take:

...there is still a large threat from deflation...

True, and it's not a credible threat. The serious concern now is that inflation doesn't start again:

U.S. Bureau of Labor Statistics
Data extracted on: October 9, 2011 (2:52:42 PM)
Consumer Price Index - All Urban Consumers

1-Month Percent Change

Series Id: CUUR0000SA0
Not Seasonally Adjusted
Area: U.S. city average
Item: All items
Base Period: 1982-84=100​