It’s Going to Be 2008 on Steroids

Friday, July 15, 2011
By Paul Martin

by Phoenix Capital Research

he 2008 Crisis occurred when private US banks became so distrustful of one another’s balance sheet risk that interbank liquidity dried up triggering a systemic implosion in the unregulated derivatives market, particularly in Credit Default Swaps (which was a $50-60 trillion market at the time).

The Federal Reserve dealt with this situation by suspending accounting policies (permitting banks to lie about their true balance sheet risk), offering to backstop those banks with the greatest derivative exposure (JP Morgan, Bank of America, Goldman Sachs, and Citigroup), shifting trillions of dollars’ worth of toxic debt to the US balance sheet and then funneling trillions of new dollars into the banks most at risk of a derivative collapse (the banks I listed before).

In simple terms, the Fed attempted to paper over the problems of insolvency that were plaguing the large financial institutions. This scheme could have worked if the Fed had demanded that the large banks decrease their leverage, cease making the deals that created these problems and began regulating the derivatives market.

However, the Fed is run by spineless academics not financial professionals or real businesspeople. So the Fed did not implement any meaningful reform. All it did was temporarily slow the pace of systemic implosion and give Wall Street a “get out of jail free” pass.

The Rest…HERE

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