Jump Starting the Shadow Banking System
You thought George Bush’s trillion dollar ‘government interference in the economy‘ was unprecedented and obscene.
The central bank — supposed to be the lender of the last resort — became the lender of first and only resort!
We’ve supposedly recapitalized our financial institutions, and had massive government intervention in the markets, but the Wall Street Journal finally tells the truth about all the good money we are throwing after bad: It has gone from ’saving the banks’, to ‘jump starting the shadow banking system’.
Why? Because the ‘no regulation’ people opened up financial markets to anyone with enough money to print a business card.
When I worked in the insurance industry, insurance companies were not allowed to sell bank products. These days, whether they can sell stocks and bonds is irrelevant. They used their savings, their reserves, to buy assets that were dangerously overvalued.
Notice the date above of 2007. Problem is, its 2009 and those reserves are further eroded by the devaluation of assets, whether admitted by shadow banks or denied.
So now we’re not just ’saving banks’.
We’re in the business of running up and down the scaffolding at the dike, putting tiny pebbles (billions of dollars) into the wall, hoping the crushing weight of the unacknowledged losses won’t push their way thru.
The best way to view the shadow banking system is as a financial amplification system. A byproduct of its operation is that it can take small financial events and convert them into financial nuclear weapons that explode with a spectacular display and devastating effect. Worse, since the entire global economic system is deeply turbulent, we can expect to see more financial nuclear explosions than ever before as the shadow banking system amplifies an increasing number of small and unexpected events into disasters.Next, there is the global economy.Finally, there is the US economy.
Our problem today?
You can’t JUMP START something the size of GODZILLA…
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