You might have thought things had changed in world financial markets since the U.S. subprime mortgage disaster. After all, we were told at the time that if taxpayers didn’t open their wallets and bail out the banks, we could face a complete meltdown of the global financial system and an economic fate rivaling the Great Depression.
Funny that only three years later, the global financial system seems once again to be teetering on the brink, a prelude no doubt to another round of emergency demands for a massive taxpayer-funded rescue of European banks, and soon others as well. As we all know, contagion spreads quickly these days in the world’s banking circles.
The only thing that seems to have changed since the last recession is a defaulting Greek government has replaced defaulting U.S. subprime mortgage holders as the trigger for the next global collapse.
As a taxpayer who is once again going to be asked to foot this bill soon, you might be wondering how did Greece ever get that big to cause so much damage to the global economy? The answer is it is the same way depressed property markets in U.S. got big enough to do the same kind of damage to the global economy several years ago
Our highly interconnected, hugely leveraged, and largely deregulated global financial system delivered a piece of the collapsing U.S. subprime mortgage market to virtually every bank in the world, just like it is about to do with a Greek default.
Whether it was from counter party risk to another bank or discovering that those AAA-rated CDOs (Collateralized Debt Obligations) were chock full of dreck, financial institutions around the world took it on the chin or, more precisely on their balance sheets.
And it is happening all over again. Didn’t UBS just write down $2.3 billion of losses from its trading desk last month?
This leaves investors with very few places to hide.
Stock markets have already fallen into bear territory, and they are likely to see nothing from the global economy over the next year to halt a further slide.
Bonds yields are already ridiculously low, relative to both inflation and the fiscal risk that huge, and soon even larger, deficits bring with them.
And the U.S. dollar, the haven everyone seems running to these days, are rolling off the U.S. Federal Reserve’s printing presses like there is no tomorrow.
If it sounds like we have been here before, it is only because we have. This time, however, there is a whole lot less in taxpayers’ wallets to bail the banks out again.
Maybe it is time to try something else- like actually changing the ways banks do business in the future.