We seen this movie before. If you’ve forgotten the horrors the Great Financial Crisis of 2007-2008, let me remind you.
A housing bubble fuelled by low interest rates and easy-lending practices peaks in 2006. The Federal Reserve is raising interest rates. Delinquency rates on sub-prime mortgages are rising. The dominoes start to fall:
April 2007: Sub-prime lender New Century files for bankruptcy.
August 2007: American Home Mortgage declares bankruptcy
December 2007: Delta Financial fails.
January 2008: Bank of America buys distressed Countrywide Financial.
March 2008: JP Morgan buys collapsing Bear Sterns for $2/share.
July 2008: IndyMac fails.
September 2008: The US Government takes over Fannie Mae and Freddy Mac. Lehman Brothers goes bankrupt. Bank of America buys Merrill Lynch. The Federal Reserve takes over AIG insurance. Washington Mutual Bank becomes the largest bank failure in US history.
December 2008: the Troubled Assets Relief Program bails out General Motors and Chrysler.
By February of 2009, the Dow has dropped 54% since its peak in October of 2007. A protracted recession has pushed US unemployment above 6%. Housing prices have collapsed.
What is important to remember about these various dominoes falling, is that, until September of 2008, each domino was treated as an isolated event. The public were told not to worry: everything was under control. Under the surface, a relentless unravelling was taking place.
In September of 2008, suddenly the sky is falling, and Wall Street needs to be bailed out of the subprime mortgage crisis they had created, or the world would end. (The holders of all those subprime mortgages get no such protection; they lose their homes!)
Fourteen years later, the first dominoes of the Second Great Financial Crisis have already fallen:
May 2022: Stablecoin Terra and cryptocurrency Luna collapse.
June 2022: Cryptocurrency hedge fund Three Arrows Capital collapses.
November 2022: Cryptocurrency exchange FTX declares bankruptcy.
February 2023: Subprime auto lender American Car Center goes bust.
March 2023: Silvergate Capital goes into liquidation. Silicon Valley Bank, America’s 16th largest bank, is shut down by the FDIC. Two days later, Signature Bank is also shut down.
We are seeing a picture eerily similar to the 2008 meltdown.
Instability shows up first in one corner of the economy and gradually spreads. In 2007, it was subprime lenders; in 2022, it is the crypto-sphere.
Then a toxic investment vehicle causes problems that radiate outwards to bigger and bigger players. In 2008, it was packaged tranches of sub-prime mortgages; in 2023, it is discounted long US Government Bonds.
The dominoes tell us about economic contagion. Whenever one player in the economic system goes down, the damage rarely stops there. First, those who invested in the failed player lose their money. If they lose enough, they too file for bankruptcy, causing losses to radiate outward.
This process of losses spreading outward takes some time, long enough that each individual domino can seem like an isolated event.
As the losses get bigger, investors get nervous, and withdraw money from any investment that bears some similarity to the latest domino to fall. (It was this spreading fear that took down Silicon Valley Bank and Signature Bank in the wake of the Silvergate collapse.)
The Federal Reserve is worried that all US regional banks could soon go under as depositors pull their money. They’ve pulled out the big guns. All deposits at SVB and Signature will now be protected, not just the first $250,000. Banks can borrow from the Fed using their long bonds as collateral, so their bond losses remain unrealized for now.
Whatever Joe Biden says, these measures smack of desperation. If the US Government can’t find a way to stop more dominoes from falling, all hell may brake loose. Will they succeed in kicking the can down the road one last time? Perhaps. For a time.
That said, if I were a betting man, I would bet that, over the next eighteen months, North America will see a housing crash, a stock market crash, and a deep and prolonged recession, each as bad as 2008, or worse. Debt, inflation, and interest rates are all too high to expect otherwise. Manage your personal finances accordingly.
PS: However bad it is in North America, Europe’s prospects are even worse. Credit Suisse just borrowed more than $50 billion from the Swiss National Bank after its shares crashed 30% in one day.
"I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them." - Janet Yellen
When this incompetent old fool says this, I immediately assume the worst. After all, she repeatedly told us that inflation was "transitory", even as our cost of living skyrocketed. Much the same as public "health" officials these days, whatever is said, expect the exact opposite to be true and act accordingly.
Hopefully people here have been investing in long-term supplies, precious metal (lead), and stuff that will be good for bartering. When the economy collapses and cash is worthless, food and other useful items will be king.