BEWARE OF FALLING BANKERS!
[This blog published in August 2007 is translated from the German on the World Wide Web, http://alles-schallundrauch.blogspot.com/2007/08/vorsicht-fliegende-banker.html.]
For a long time I predicted the financial crisis coming from America. The collapse of the bridge in Minnesota, the explosion of the steam conduit in New York and so forth are the visible signs of a collapsing system. 25% of all the 590,750 bridges in the US are described as "structurally endangered" by the American Society of Civil Engineers (ASCB). To rehabilitate them, "9.4 billion per year for the next 20 years is needed." How can that happen if presidents are "elected" who spend money only for war and not on maintaining the infrastructure?!
The American financial system is as dead beat as the bridges and power system of the country. Now the whole world is affected. This is the great disadvantage of globalization because everything is interwoven and connected. A crash in the US triggers a worldwide chain reaction. Around the globe, the central banks have pumped billions into the banking system to calm alarmed investors. The worldwide fear of an intensified credit crisis induced the European Central Bank, the US Federal Reserve and the currency guardians in Tokyo and Sydney to more liquidity injections. Nevertheless the central banks could not soothe investors on the stock markets. Prices fell dramatically in Europe and Asia. Wall Street has also recorded massive losses.
The European Central Bank has made available the record sum of 95 billion euro to be supplemented with another 61 billion euro. This was the first time since the crisis after the attacks of September 11 that the custodians of the euro have taken such drastic steps.
The US Federal Reserve pumped around $24 billion into the market on a single day. The Canadian central bank also infused more money than usual in the markets. "What the central banks are doing is a concerted attempt to supply sufficient liquidity," said Jimmy Koh, currency strategist at the United Overseas Bank. "What is alarming is that they are doing this when the currency markets are not functioning as they should."
On Friday, the central banks of Japan and Australia pumped more money into the market ($8.45 billion and $4.2 billion respectively) than in the past. On account of the crisis, the central banks in several Asian countries were forced to intervene in the currency market to support their currencies.
The $155 billion pumped into the system on one day were not peanuts. This shows the precariousness of the situation.
In Germany, the situation is also terrible. The German Bundesbank holds one crisis meeting after another to prevent the collapse of the IKB and other banks. According to rumors, the West German regional bank and the Saxony regional bank have great problems. If these big banks collapse, the whole global financial system will break down.
Asset Backed Commercial Papers threaten the German banking system and can have a worldwide effect. This kind of financing involves dangers when the parties become bankrupt and the commercial banks must answer. Many banks have sold these ABCPs to hedge funds and other banks which theoretically could redeem these in case of emergency. The problem is that the banks accepted many more ABCPs than they needed. When a mass assault comes, the banks will be insolvent.
The case of the IKB shows what can happen. Because the US hedge fund Rhineland Funding financed by the IKB had deficient cover, the IKB had to help out. It wanted to cash its ABCPs with Deutsche bank which refused because the bank's head Ackermann was already in a panic on account of the Bear Streams affair. Therefore the IKB collapsed. Now the central banks are trying to rescue the attacked banks with massive liquidity or tons of cheap money. "The stability of the German financial market is at stake," the federation of German banks declared. The head of BaFin financial oversight, Jochen Sanio, warned of the most serious banking crisis since 1931 if the IKB and others collapse. Worry over the US real estate market also burdens the German stock market.
For years, the defenders of economic liberalism stylized the booming US economy as a good example and criticized German sluggishness. The "economic miracle" and the greatly praised "American way of life" are illusions, pipe dreams, castles in the sky, empty balloons that are now bursting. This consumption bubble was only financed with debts, many from foreigners. Credits were given to socially weak and poor Americans who under normal circumstances would never have received money. People bought expensive consumer articles that otherwise they never would have sought.
The growth of the economy and the consumer frenzy which the US government always praised was built on credit. Real estate credits and credits for cars, boats, motor-homes and even credit card debts were given to subprime customers with trifling creditworthiness that they could hardly repay. American banks bundled these credits and passed them on to investors who bought the loans in the form of complex packages on the capital market. The IKB and other stupid foreigners bought the shares without ever seeing the debtors and demanding securities from them.
Now when US citizens can no longer pay on account of low home prices, job losses and higher interests, the system collapses and the creditors have nothing solid in their hands. To the money-greedy financiers, it is only an air bubble. The great panic is beginning.
We may soon see flying bankers if the problems continue and all this becomes reality.
The French financial paper La Chronique Agora says: "This time the alarm on the credit markets is on an unprecedented scale. This is an end of an epoch, the end of the illusion of unlimited worldwide liquidity. An illusion dies that the central banks and finance ministries have complete control over the volumes of money and credit piled up over the years.
The situation is that of a giant (the American economy) on shaky foundations balanced on a gigantic balloon, the real estate bubble. The credit- and derivative market needing continuous infusions of new money from the Federal Reserve relies on the giant. The world finance markets that have a fear of heights stand at the very top above this dangerous creation.
Investors still sitting on their chairs are the spectators of this monstrous spectacle. But they seem ready to immediately stand up and leave the hall, run to the emergency exit quietly and disciplined or in a panic overturn the chairs and climb over their neighbors in the escape... "