Tuesday, November 10, 2009

Contagion: Been There, Done That

If you haven't seen Commanding Heights, we highly recommend it. It goes best with a strong thinking cap so you can read between the lines and find the subtle nuances of cause and effect in global finance.

I part three in particular, they covered the Asian Financial Crisis that started from a small little economy, that through currency controls created the exact same financial situation we had last year (don't miss the entire city built from the ground up on debt financing to which no one ever moved in to populate!), and as the piper came calling and financiers decided they were no longer going to sing that tune, it spread to all the healthy nations in the region as electronic funds transfers sucked all the money out of the region, one nation after another.

The funny thing is, that time the money needed a place to park, so it fled to another emerging nation -- Russia. They didn't go into details on the underlying reasons for Russia's default on debt, but ultimately it lead to Long Term Capital's implosion.

And then Brazil was hard on its heals with another collapse in this game of financial dominoes, but was averted by a quick influx of bail out money as the signs of stress were about to crack.

In every case: bail out after bail out after bail out.

The difference in 2008 was apparently "they" (those with all the money under control) learned how not to make the same mistake. When credit stopped in 2008, the money this time went straight to U.S. Dollars. No messing around this time with some new emerging entity that offered hope and promise of the perfect utopia. Instead, get out, park the money in the one nation and one security most likely to not have a political revolution over the hub-bub, and wait it out.

So in spite of all the uproar over Federal Reserve emergency lending and government bail out of banks in 2008, it really was not unprecedented. It was exactly what was done the last time. The only difference being this time it was an internal massive bailout instead of foreign nation massive bailouts. We contend the labels on the entities in question are irrelevant. It's the same thing every time (remember the third-world financial bail outs in the 80s?) Apparently it's a necessary evil every decade.

There is nothing new under the sun. Watch it, learn to read the signs, and get ready for a repeat since the fundamental foundations, the global monetary systems, haven't changed one bit. The hard part is learning how to discount and ignore the incessant monthly claims that "it's going to happen again!! Sell now and protect yourself!!!"

Meanwhile, like last time, it appears the contagion has stopped spreading. See our other post today, The Financial Crisis of 2008 is Officially Over.

We left out one interesting link on those references though. Just as Brazil's contagion was contained by preemptive quick response, The Fed has preempted the Commercial Real Estate issues that are falling on the heals of this most recent global financial crisis. Like Brazil's non-issue of the 90s, we predict the present CRE "crisis" will also become a little known financial issue of 2010.

In a nutshell, banks can restructure the loans and won't be "criticized" for what otherwise would have been bad lending practices. It's now OK to carry bad debt on the books.

Just like Japan? Well, not exactly. Turns out we can learn another important fact from Commanding Heights. In the 90s, when Japan's banks were stuck with all those bad loans, one bold man stood up and suggested if they want to get out of the crisis they need to loosen up the over-bearing burdensome regulatory structure that was constraining the banks. He was quickly fired from his cabinet post, they refused to "fix" the systemic problem, and the lost decade ensued.

If Benny and Timmy had nationalized the banks in the U.S. to "solve" our crisis and put massive layers of regulation on them (as if you can implement "Soviet Union Economics" and create vital capital formation) then we would have been destined for a lost decade in the U.S. as well. Instead, we have a much better chance of getting back to normal, which is setting ourselves up for another crisis in the teens of the 21st century just like the previous three decades.

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