The public only takes an interest in the health of the economy when it sees significant stock market falls on the news. It seems that if the stock markets don’t fall, the crash doesn’t exist. But unfortunately, the crash has already been unfolding in the credit market since the summer of 2007. And this failure of the RF forms the foundations on which many other aspects of the economy are based, including the stock markets. As we said in The unstable chemistry of the economic molecule Half a year ago, a strangely distorted RF could not coexist for long with a buoyant RV. We were banking on a rebalancing in the form of a recovery in credit confidence, but as we noted in that article, the other possibility was that the market would stabilise in a state of mistrust, with equity losses, whilst keeping fixed income at record lows «…breaking records in a matter of time, leading to a global crisis the likes of which has never been seen…».
In recent weeks, we have been seeing falls in global stock markets, which are unfortunately fuelling widespread mistrust, raining on already flooded ground. At present, this is leading to financial panic, casting doubt on the solvency of banks and severely accelerating the deterioration of the financial system. This effect is devastating and turns a stock market crash into banking chaos – in institutions that are already mortally wounded – when these should be entirely separate phenomena. A conventional stock market crash (such as that of ’87 or even ’29) should not only have no substantial impact beyond the markets themselves, but is even cyclically healthy. But This time, the interconnections between the multiple crises are deadly.
As for the financial situation of the global banking sector, it is critical. The US banking sector is suffering beyond description, whilst the European sector holds approximately half of the existing credit sludge. It therefore seems likely that the extent of the European crisis will be at least as severe, given that its capacity to respond is more limited by the lower potential of its economies and, worse still, the fragmentation of policies further complicates the already limited room for manoeuvre available to Europeans in general.
The much-vaunted greater readiness of the Spanish banking sector to tackle this financial crisis is, to a certain extent, real but irrelevant. In other words, the problem at hand is of such magnitude that the qualitative advantage of Spanish regulations FGD It is despicable. Proof of this is that the political measures adopted at the meeting of the 27 have been to ensure for the time being €100,000 per account holder and institution – which is a far cry from the much-vaunted qualitative superiority of the now obsolete €20,000. Perhaps these measures will not be enough to restore confidence, or perhaps they will, but for the time being the Show Me the Money It is gaining ground… Time (and we) will tell. In any case, this is a measure of trust, an act of faith. After all, these guarantees will apply to all savers, regardless of whether the bank failure affects a few thousand savers or every Spaniard, as if it were a piece of chewing gum. And even if it isn’t true, it’s a clever turn of phrase, which is what it’s all about.
The root cause of the banking crisis – namely, the toxic assets that are driving banks into technical insolvency – is in the process of being resolved. A political solution, since As far as a financial solution is concerned, the towel was thrown in a long time ago. In this scenario, Spanish banks, like their European counterparts, are no longer self-sufficient. Their ability to survive on their own is virtually non-existent. It seems that bailouts will follow one another in a macabre and unpredictable sequence, and this does not depend so much on the ranking of CDS‘… but rather on the decisions of its executives, who will seek the least bad moment to fall out of an increasingly cramped and overcrowded cupboard. But there is another danger even worse than the contamination of assets itself, and for which State bailouts would be unlikely to be effective: Panic. Our panic as customers of banks and building societies. No financial institution is prepared for a mass withdrawal of funds. But this is not solely due to their current precarious situation; even in their heyday of record profits (the day before yesterday), a mass withdrawal of money would have devastated their balance sheets. And in the face of that risk, there is no possible bailout. The system operates through links as intangible as trust, and there’s no room for repairs or welding, not even botched jobs to keep things going for the time being: Either it’s there or it isn’t.
Banks no longer lend money to one another; they don’t trust each other. However, we really must do it, and we must carry on lending them ours, because if we keep it under the mattress, that’s it, we’re done for. And only if the financial system continues to function – despite its current malfunctions – can we hope that interbank confidence will return and that the flow of money will once again lubricate an engine that has been stalling for days. We can prop up the system by withdrawing our money from the bank (only the first few); or we can rely on state guarantees and hope that the wealthiest will diversify their fortunes across various accounts and/or account holders. Among the collateral damage caused by these measures, it is worth noting that this week’s plan – the result of the meeting of the 27 European leaders (which will not be the last) – does not guarantee investment funds. And that is something that was best left unmentioned, as it is likely to provoke a flight to quality which would exacerbate the stock market slump in favour of sovereign debt or, in the worst-case scenario, lead people straight to their savings and hiding places under the floorboards. But I’d rather not think about that because it would really hurt us, and it’s within our power to prevent it.
Above and beyond the toxicity of the securitisations held in the banks’ vaults; above and beyond state bail-outs, whether or not coordinated with private vulture operations; above the surprise, globally coordinated half-point cuts in multi-currency interest rates (something never seen before)… above all of this, despite everything, it is in our hands to bring about the end of the system. If we do not continue to lend our money to the banks, there is no possible salvation. Those of you who have read my work regularly will already know that I have a particular aversion to the behaviour of banks and bankers, and I shall certainly not be the one to defend them. 
But without banks, our society would be set back several decades in terms of prosperity and wealth creation. Unthinkable. I am convinced that The chances of such chaos occurring are minimal, but it is also true that we have never been as close to it as we are today.
If we don’t do anything reckless, there will be a future for the system, although it will be a mad future, involving a great deal of suffering. Let’s not forget that the most toxic mortgages have only just begun to surface. Over the next two, three or four years, we are likely to see the worst of it. In other words, these will be the worst years for the governments that will have to absorb the loans, which are already turning into foreclosures with no prospect of realisation, but with one aggravating factor that will make them radically different: unlike the lending institutions that sold the loans, the government or the quasi-public bodies created ad hoc, They will not be able to allow the mass repossession and eviction of their population. Perhaps social solutions will be adopted to allow tenants to remain in what were once their own mortgaged homes, in exchange for rents well below market rates. They may also have limited options to buy in the future. But what seems unthinkable is that mortgage foreclosures by public bodies should cause a social and human crisis for millions and millions of people. A genuine housing subsidy in the truest ‘popular’ style (that of the Chinese Communist Party, not the PP).
Ultimately, we are faced with a very, very socialist scenario – some might even call it communist. There is no doubt that seeing the most ultra-liberal state on the planet – which for years has denied its citizens even decent social healthcare provision – nationalising existing housing and subsidising it is somewhat surreal. This will result in a form of nationalisation and state intervention that is as unintended as it is effective – and I would go so far as to say that, in many respects, it is fair. Unintentionally fair, and we’ve ended up here in the worst possible way.
I have been writing for months that we are facing a multi-crisis on an unprecedented scale. Despite this, I have always maintained a relatively optimistic tone, but events have taken a sudden turn. There is a ‘before’ and an ‘after’ the collapse of Lehman Brothers. A turning point in political, financial and economic terms. What we have seen since then is more than just a black swan, and so the old playbooks are proving of very little or absolutely no use. The situation is so serious that it has overshadowed the very energy crisis we were experiencing just three months ago. As for the economic and social crisis, my view is, unfortunately, very pessimistic. We are only seeing the tip of the iceberg. 
I fear that the worst is yet to come between 2010 and 2012, when competition amongst companies will be fierce and unemployment figures overwhelming and cruel. Being in debt at this time is, and will remain, too heavy a burden to maintain a decent household economy. The depression will be a long one – perhaps a decade spent traversing a desert where many economies – those of countries, companies and individuals – will fall by the wayside. Fortunately, most people are unaware of the gravity of the situation, but the reality is quite different: Farewell to Disneyland – farewell for many years to come. And all of this, more globalised than ever.
No state has enough money to patch up this web. The money will have to be created, and in doing so, a large part of the wealth generated by the system – perhaps virtually – over decades will be destroyed. And once this depression has been overcome, governments will probably cede the limelight to large corporations, giving rise to a New World Order that is unimaginable at present. But for that to happen, we must first try to overcome the unprecedented depression that we can only sense today.