“We’ve obtained robust monetary establishments…Our markets are the envy of the world. They’re resilient, they’re…modern, they’re versatile. I feel we transfer in a short time to deal with conditions on this nation, and, as I mentioned, our monetary establishments are robust.” – Henry Paulson – 3/16/08
“I’ve full confidence in banking regulators to take applicable actions in response and famous that the banking system stays resilient and regulators have efficient instruments to deal with this sort of occasion. Let me be clear that throughout the monetary disaster, there have been traders and homeowners of systemic giant banks that have been bailed out . . . and the reforms which have been put in place means we aren’t going to do this once more.” – Janet Yellen – 3/12/23
With the current implosion of Silicon Valley Financial institution and Signature Financial institution, the most important financial institution failures since 2008, I had an awesome feeling of deja vu. I wrote the article Is the U.S. Banking System Safe on August 3, 2008 for the Searching for Alpha web site, one month earlier than the collapse of the worldwide monetary system. It was this text, amongst others, that caught the eye of documentary filmmaker Steve Bannon and satisfied him he wanted my perspective on the monetary disaster for his movie Generation Zero. In fact he was fairly unknown in 2009 (not a lot anymore) , and I proceed to be unknown in 2023.
The quotes above by the mendacity deceitful Wall Avenue managed Treasury Secretaries are precisely 15 years aside, however are precisely the identical. Their sole job is to maintain the boldness sport going and to guard their actual constituents – the Wall Avenue bankers. And simply as they did fifteen years in the past, the powers that be as soon as once more used taxpayer funds to bailout reckless bankers. Two hours earlier than the one resolution the Feds know – print cash and shovel it to the bankers – Michael Burry defined precisely what was about to occur.
When Biden, Yellen, and the remainder of the Wall Avenue safety workforce let you know the banking system is secure they usually have it beneath management, they’re mendacity, simply as I mentioned fifteen years in the past.
“Our economic system and banking system is so advanced and intertwined that nobody is aware of the place the subsequent shoe will drop. Politicians and authorities bureaucrats are mendacity to the general public after they say that every thing is alright. They have no idea. Do you have to imagine a governmental company that wishes the general public to stay at the hours of darkness to keep away from financial institution runs, or an impartial evaluation primarily based upon stability sheet evaluation?”
Again within the days of The Big Short, earlier than the general public knew about poisonous subprime mortgages issued by felony bankers and packaged into derivatives given a AAA score by the grasping compliant score companies, the Wall Avenue cabal knew time was rising brief, however that didn’t hold the mendacity bastards like John Thain (Merrill Lynch), Dick Fuld (Lehman Brothers), Angelo Mozilo (Countrywide), Kerry Killinger (Washington Mutual), and others from pretending their establishments have been wholesome and worthwhile – proper up till the day they collapsed. Mendacity is within the DNA of each monetary government, politician, authorities bureaucrat, and Federal Reserve hack.
The quote from Hemingway appeared pertinent in 2008 and is simply as pertinent right this moment.
There are a lot of similarities between what was occurring in 2008 and what’s occurring right this moment. Bear Stearns went belly-up in March 2008 and was taken over by JP Morgan in an organized marriage by Bernanke and the Fed. The standard suspects assured the nation this was a one off state of affairs and the banking system was robust. The Wall Avenue banks had been reporting big earnings as a result of they have been hiding the huge losses on their stability sheets. In the event that they didn’t foreclose, they didn’t need to write-off the mortgages. The poisonous debt simply saved constructing.
In the summertime of 2008 the banks began to report losses, however assured traders it was solely a one time hit. All was effectively. The week I wrote my article Wall Avenue financial institution shares had soared 20% or extra as a result of their reported losses for the 2nd quarter have been lower than anticipated. My article lower by way of all of the BS being shoveled by the likes of Larry Kudlow, Jim Cramer, the Wall Avenue CEOs, and the supposed analyst consultants who nonetheless had purchase rankings on these bloated debt pigs. My evaluation was considerably opposite to the CNBC lies:
“I’d estimate that we’re solely within the early innings of financial institution write-offs. The write-offs will a minimum of equal the earlier peaks reached within the early Nineties. If a big financial institution corresponding to Washington Mutual or Wachovia have been to fail, it might wipe out the FDIC fund. If the FDIC fund is depleted, guess who pays? Proper once more, one other taxpayer bailout. What’s one other $100 or $200 billion amongst mates.”
Merrill Lynch was reporting billions in losses and issuing new inventory to attempt to survive. They have been clearly in a dying spiral and I noticed the writing on the wall:
“How lengthy will traders be duped into supporting this catastrophe? You may make certain that the opposite suspects (Citicorp, Lehman Brothers, Washington Mutual) can be saying extra write-downs and capital dilution within the coming weeks.”
By the top of September Lehman Brothers and Washington Mutual have been gone. Merrill Lynch and Wachovia have been acquired for pennies, and Citicorp turned a zombie financial institution sustained by the Fed for years. My article was dire and my evaluation confirmed we have been in for years of ache and the worst drop in housing costs in historical past:
“There are $440 billion of adjustable mortgages resetting this yr. Meaning that almost all of foreclosures won’t happen till 2009. Which means the banks will nonetheless be writing off billions of mortgage debt in 2009. The reversion to the imply for housing costs and the continued avalanche of foreclosures will not be a recipe for a banking restoration. Home prices have another 15% to go on the downside.”
“The patron is being compelled to chop again on consuming out and purchasing. The marginal gamers will fall by the wayside. Massive field retailers, eating places, mall builders, and industrial builders are about to search out out that their large growth was constructed upon false assumptions, a basis of sand, and pushed by extreme debt.”
It appears I used to be fairly correct in my evaluation, as residence costs went down greater than 15%, not bottoming till 2012. This international monetary collapse introduced an finish to the massive field growth section, as many went beneath, and the survivors targeting their present shops. We entered the worst recession for the reason that Nineteen Thirties. Probably the most attention-grabbing half in going again to my 15 yr outdated article was the psychology of the group revealed within the remark part. Regardless of my use of unequivocal details, I used to be branded a doomer, overly pessimistic, and an fool. Many commenters mentioned the Fed would save the day and it was time to purchase the dip. If that they had purchased the dip on the day of my article, they might have misplaced 44% over the subsequent 8 months throughout a relentless bear market.
The query now’s whether or not the present state of affairs is best or worse than the state of affairs we confronted in 2008. There are some factual objects which can assist in assessing the place we’re. In August 2008 the nationwide debt was $9.5 trillion (67% of GDP). Immediately it’s $31.5 trillion (130% of GDP). Complete family debt was $12 trillion in 2008 and stands at $17 trillion right this moment. The Fed’s stability sheet was $900 billion in 2008 and now stands at $8.3 trillion. Inflation was at a 17 yr excessive in August 2008 at 5.9% and stands at 6.0% right this moment. GDP was rising at 3.2% in 2008, versus 2.7% right this moment. An neutral observer must conclude our financial state of affairs is much worse than 2008.
However all you hear is completely happy speak and false bravado from Wall Avenue analysts overlaying their very own bancrupt business. They continually harp on the very fact mortgage lending is way more threat averse and safe. In fact the subsequent liquidity pushed disaster isn’t pushed by the identical precise components because the earlier liquidity pushed disaster. However the important thing components are all the time the identical. Free financial insurance policies by the Fed result in extra threat taking by grasping bankers, hedge funds, and company executives. Then one thing blows up and the billionaires get bailed out on the expense of the taxpayers who’ve been getting devastated financially by the inflation attributable to Powell and his printing press.
Thus far, this newest banking disaster “that nobody may see coming”, besides any sincere monetary analyst who understands math and historical past, is following the identical path as 2008. The narrative about banks not taking credit score threat and peddling unhealthy mortgages is being blown up as we converse. As a substitute of the danger being centered on poisonous mortgages like 2008, the danger has permeated each crevice of the monetary system as a consequence of years of 0% charges by the Fed. Nearly every thing is overvalued by 30% to 50% as a result of low-cost debt was out there to everybody for every thing. Extraordinarily low rates of interest led to excessive threat taking by bankers, firms, residence consumers, auto consumers, and politicians. The unleashing of inflation by Powell’s insurance policies has led to the tide going out and revealing who was swimming bare.
Whereas threat managers at banks internationally have been concentrating on variety and pushing woke agendas about transgender rights, local weather change and practising ESG investing, they ignored the straightforward idea that bonds they acquired at 1% lose cash when rates of interest go to 4%. Simply because the banks in 2008 have been sitting on billions of unrealized losses from the poisonous mortgages on their books, the identical banks are actually sitting on billions of unrealized losses from the most recent poisonous asset – U.S. Treasuries. Everybody is aware of it. It’s simply math. They’ve been relying on Powell to reverse course, however with reported inflation nonetheless at 6%, he’s trapped. Silicon Valley Financial institution and Signature Financial institution have been swimming bare and when depositors realized that truth a financial institution run ensued. Poof!!! Sudden Disaster.
The narrative being spun is this can be a regional banking disaster confined to smaller banks. This narrative is being spun by the massive Wall Avenue banks and their captured media mouthpieces, with the intent that depositors at smaller banks would panic and shift their deposits to the “secure” Wall Avenue banks. The reality is that the Wall Avenue banks have large ranges of unrealized losses and desperately want deposits to maintain them from dealing with the identical destiny as Silicon Valley and Signature. These unrealized losses aren’t going away and should be realized within the close to future.
Credit score Suisse has been the loopy uncle of the monetary business, saved within the basement for years. Their demise is a foregone conclusion, however that has been coated up and ignored by these within the know. They seem like the brand new Lehman Brothers, which is able to blow up the already bancrupt European monetary system and unfold a contagion of losses throughout the monetary world. These quadrillions in obscure derivatives are an unknown factor within the coming meltdown. However you may be positive they gained’t have a constructive impression.
Each small and huge banks have little to no reserves left to lend. Debt issuance is the Potemkin ingredient in conserving this farce of an financial system working. With out debt to finance overextended shopper existence, funding wars in Ukraine, and the woke agendas of firms and politicians, the complete facade collapses.
Actual wages have been destructive for 23 consecutive months. A banking disaster means banks will scale back lending dramatically. Customers have been compelled to stay off their bank cards for the final two years, as their financial savings dried up and their wages purchased much less. A deep recession is within the playing cards. Customers are already pulling again and spending much less. With credit score drying up and spending happening, employers throughout the globe will begin laying folks off. As unemployment rises, folks will cease paying their monumental mortgage and auto loans. This may result in extra losses at banks, similar to 2008/2009.
Everybody will look to the Fed to avoid wasting the day. And they’ll faux they’ve every thing beneath management, however they don’t. Again in 2008 their stability sheet was solely $900 billion. Immediately it’s 9 occasions as giant. The relentless QE whereas rates of interest have been suppressed has left them with monumental unrealized losses on the mortgage and Treasury bonds they purchased. They let the inflation genie out of the bottle and now it’s ingrained within the economic system. Corporations who gave 2% annual raises to their workers for a decade are actually compelled to present 4% or extra because of the Fed created inflation.
If the Fed slashes charges and goes again to cash printing by way of QE, the present 6% inflation price will skyrocket again to double digits. If Powell does nothing or continues elevating charges, the banking system will seemingly collapse. His selections are deflationary collapse or hyper-inflationary collapse. He’s caught between the proverbial rock and a tough place. Since he’s managed by Wall Avenue, he’ll slash charges, restart QE, backstop the bankers, and screw the common American, as all the time. My conclusion reached in my 2008 article, simply earlier than the monetary system imploded appears, for essentially the most half, to use right this moment.
“The U.S. banking system is basically bancrupt. The Treasury, Federal Reserve, FASB, and Congress are colluding to maintain the American public at the hours of darkness for so long as attainable. They’re attempting to purchase time and prop up these banks to allow them to persuade sufficient fools to present them extra capital. They’ll proceed to put in writing off debt for a lot of quarters to come back. We’re at risk of duplicating the errors of Japan within the Nineties by permitting them to faux to be sound. We may have a zombie banking system for a decade.”
We by no means paid the piper and cleaned out the excesses of the earlier banking disaster. The monetary situation of the nation is much worse than it was in 2008. The monetary situation of the common American is much worse than it was in 2008. The monetary situation of the Federal Reserve is much worse than it was in 2008. The monetary situation of the banking system is much worse than it was in 2008. Our leaders kicked the can down the street as a way to give the system the looks of stability, and we allow them to do it. We may have taken the ache in 2008 and let the system reset after purging all of the unhealthy debt and unhealthy banks, however we selected the improper path and can now undergo the results described by Ludwig von Mises a century in the past.
“There is no such thing as a technique of avoiding the ultimate collapse of a growth caused by credit score growth. The choice is barely whether or not the disaster ought to come sooner as the results of voluntary abandonment of additional credit score growth, or later as a closing and whole disaster of the forex system concerned.” – Ludwig von Mises
My recommendation 15 years in the past on the finish of the article was to scale back your deposit publicity in any respect monetary establishments, don’t put money into monetary shares, comply with the writings of sincere truthful analysts and this closing piece of recommendation, which is as stable now because it was then:
“Whenever you see a financial institution CEO or a high authorities official let you know that every thing is alright, run for the hills. They’re mendacity. They didn’t see this coming they usually do not know the way it will finish.”
We’re at the start of the subsequent international monetary disaster, not the top. Fourth Turnings don’t fizzle out. They construct to a crescendo of chaos and struggle. This monetary disaster will usher within the navy battle that has been beckoning for the final yr. Time to buckle up and put together for the approaching storm.