Grandinite

Capitalism is in crisis (when isn’t it?). Capital moves from one pool of assets in search of a return or earnings, and as the irrational herd follows into the mania, assets are bid up above and beyond their true underlying value. When the difference between the perceived and real value of the assets become too large, someone says: “Look! The Emperor has no clothes”, and a mad sell-off ensues. Those who exited at the top of the crisis swoop back in after the carnage stops to buy up the damaged goods, thereby concentrating ownership of capital into fewer hands.

I was reading George Ure’s special Saturday blog post, something he’s done in light of the current financial crisis. This is much of the same content, presented in a different manner.

In short, there are runs on banks all around the world right now, some more obvious than others.

Here in Canada, I have heard the following justifications for why we may be immune:

1. Our banks are well capitalized.
2. Our banking system is highly regulated to prevent such things.
3. We’re not as ostentatious as Americans in our borrowing habits: less subprime lending and less home equity loans in Canada.

Those may be truths, but when it comes to herd behaviour, such thinking is moot. What matters, in my mind, is the difference between actual and perceived risk. There may be only one or two wolves on the horizon, but the herd might react as though there were an entire wolfpack. Get it?

Up until the current crisis in the US, Hank Paulson was gushing with optimism and confidence in the system. He was trying to keep people from over-reacting to the state of the crisis. While it might be manageable in economic theory, where agents are rational decision makers, here in the real world, people act on rumors and make irrational choices on blurry information. If the herd’s perceptions skew towards the psychotic end of the spectrum, rational heads will still lose money. When a bank run finally occurs, the rational expectations crowd stands in shock and says ‘we never saw it coming’.

So, while Stephen Harper is probably right in saying that our ‘fundamentals are fine’, does that really matter if the global system is at risk of collapse? Economies are networked and interlinked; we don’t exist in an economic vacuum. Pardon the analogy, but can Canada avoid a global economic version of HIV while barebacking with the United States? Harper is effectively saying our economy is like that guy in High School who managed to sleep with 50 partners without getting a single STD yet he never used a rubber because his ‘fundamentals are fine’. The logic is false. Just because you’ve been immune in the past, it does not follow that you’ll be immune in the future.

Who does Harper think Canada is? Switzerland? Even Switzerland is facing a recession right now.

Does Canada really have enough economic prophylactics in place to avoid contagion?

In my estimation, the US is in a HIGHLY precarious spot right now. Markets are teetering, plus there’s an election – that’s primetime for an ‘event’ that would constitute a tipping point and send this Grand Experiment to the FAIL bin of history. Those in the know are well-prepared. We have 500,000 troops in the streets of America running exercises in preparation for an ‘event’. We have banks like Wachovia falling prey to ’silent’ bank runs. America right now is holding fast to the Boy Scout’s motto of “Prepare for the worst, hope for the best”.

Credit markets to Washington: Bailout isn’t enough

The credit markets finally got a bailout bill, but the stranglehold hasn’t let up — a troubling sign that lenders and investors believe the package will only be a baby step in the long road to economic recovery.

Yahoo.com: Slow-Motion Bank Run in Progress:

That “run” could accelerate as people realize the FDIC fund has about $50 billion to “insure” about $1 trillion in assets at the nation’s financial institutions, says Roubini. “They’re going to run out of money” unless Congress acts soon to recapitalize the FDIC.

Related: Forbes – Next: The Mother Of All Bank Runs?

In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.

Wachovia faced ’silent’ bank run; FDIC forced sale

On Friday, with its stock plunging 27 percent, Wachovia experienced a “silent run” on deposits, but the bigger worry for regulators was that other banks wouldn’t provide the Charlotte bank with necessary short-term funding when it opened for business Monday, sources familiar with the situation told The Charlotte Observer.

Hong Kong man arrested over bank rumor

Hong Kong police have arrested a man for allegedly posting a message on the Internet that a financial institution would be shut down amid worries that the U.S. financial meltdown will spread to the territory.

Rumors Spark Run on Hong Kong Bank

Rumors rattled customers of a Hong Kong bank, sparking the city’s first bank run in decades. And, a leading American stock market company is linking up with Vietnam’s stock exchange. VOA’s Kate Pound Dawson in Bangkok has these stories and more.

Youtube: Rep. Sherman Claims Representatives Threatened with martial Law Unless bailout Passes

Army.Mil News: Troops Now Patrolling Small Towns, Cities

FORT STEWART, Ga. (Army News Service, Sept. 29, 2008) – The exercise scenario was a sobering one: a 10-kiloton nuclear device detonated in America’s heartland, quickly overwhelming civilian responders.

telegraph.co.uk

The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system.

Rumors of a Banking Holiday Circulating

And the Nice Government Men are worried about bank runs, you bet your life. That’s why they raised the FDIC insurance deposit limit from $100,000 per account to $250,000 per account. Little known fact: banks have no cash. Literally. Haven’t kept it for years. Greed decrees they keep no reserves, but put everything “to work,” so why miss interest by keeping cash lying around in the vault. Illiquidity, thy name is bank! Now rumours of a banking holiday abound, when the government closes down the banks for a week or so to cool off the depositors’ frantic desires to see their money again, foolish hoi polloi that they are.

Will the Crisis Bring Down the Global Financial System? Go Get Your Dollars Out Now! FAST!!!

As Argentine citizens, we have a huge advantage over other peoples including US citizens when it comes to understanding and coping with this kind of crisis. I say this because in our own lifetimes we have suffered in Argentina all of what is now happening globally – albeit on a much smaller scale in our case. We’ve seen this movie… We’ve been there, and done that… We’ve been pushed and dragged through the entire hysterical hocus-pocus of inflation, hyperinflation, systemic banking collapses, currency changes, Debt Bond Swaps, Mega-Debt Bond Swaps, financial “armouring”, banking holidays, freezing of bank accounts, etc., etc… And we have also suffered the end-results: bank bail-outs paid for by taxpayers (or through inflation, or through the confiscation of savings), disappearance of pension funds, destruction of job posts and overall impoverishment of the population.

So, take a clue from our thirty years’ experience in “financial meltdowns”: GO GET YOUR DOLLARS OUT FROM YOUR BANK NOW, AND DO IT FAST!!!!

1929 The Wrong Analogy for Today’s State of Affairs

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls “the real Great Depression.” She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.