Nestling crises and the shadow of the final crisis

The crisis of the financial system

In 2008, the crisis of the financial system was brutal and explicit, the Fed intervened to provide liquidity or recapitalized banks by installment loans for bad credit of fresh money. The second crisis was more discreet, the Fed again intervened to save the financial market by avoiding the collapse of GSE Fannie Mae and Freddie Mac ($ 1300 billion of assets in portfolio in 2008) and their RMBS ($ 4000 billion in guaranteed assets in 2008), equivalent to more than half the value of the assets of all US commercial banks in 2008. It also intervened to revive the real estate market through purchases modest Ginnie Mae RMBS. The results of these two interventions are debatable. The financial sector is better after having pushed a lot of dust under the walls, we still cough on the boards but it is with discretion; bank credit remains in contraction as a result of the deterioration of the borrowers’ situation. Real estate remains depressed; after 18 months of the effort of the FED, his future was put in the hands of the market. The FED will now buy treasury bills by turning away from the residential real estate.

This mitigated assessment would not be so serious if the decision of the FED had not introduced in the US financial policy a pataquesse fraught with danger: the FED will leave in 2010-2011 its balance sheet deteriorate (Report Asset-Liabilities), it will be financed a little more by deposit-taking institutions (commercial banks, mutual banks, savings banks), but what guarantees the balance sheet of the FED, and thus the loans of deposit-taking institutions, is ultimately the Treasury. However, the Treasury guarantee has become fictitious since the FED finances it. As for the Reserve Institutions, the counterpart of their loan is the assets of the FED, ie the treasury bills it holds, but the Treasury bills of the FED are guaranteed by the Treasury which is financed by the FED. In short, the US sovereign debt has since November 2010 officially the ass in the air.

Already reluctant to guarantee the long-term debt of the Treasury, The global financial market will soon discover with horror that the issues and the level of interest rates are administered and that treasury bills are no longer based on fictitious guarantees. Moreover, the insincerity of hedges and interest rates on the federal debt no longer fixes the cost of sovereign debt at the market price. Beware of the turnaround: the conditions of major incidents on the debt are met. It would be a miracle that they do not happen.

Developments in sovereign debt management clearly point to a real risk of a final crisis in the US financial system

The crisis phases are like nesting dolls. An explicit crisis (the financial crisis of 2008) opens with a second crisis occulted (The crisis of the GSE in 2009 and the T1 and T-2 2010), then, on a third creeping crisis, the crisis of the debt of spring 2010. The third crisis is the most dangerous, it affects a sovereign debt whose rescue by the FED goes against the market rules; moreover, this last phase of crisis did not leave behind a financial market or a residential real estate really recovered by the two previous crises. What is more, the FED treasure couple by making cavalry on sovereign debt expresses all the contradictions of the stimulus policy that does not know which instrument used to revive the economic machine. If the FED must intervene to the rescue of the Treasury, it is because investors doubt the financial sustainability – and hence tax – a mediocre revival on credit to a few months. They are right!

The new horizon of the American crisis is sovereign debt. The economic context and the insincere financing of growth on credit are explosive elements. They weigh on the Treasury and the US economy the shadow of a final crisis: an irreversible depression. But is not this what leads to the US policies opposing denial to the reality of a crisis of a model of unbalanced growth. The shortest way to go from depression to depression is to ask the politician to provide false answers do not address the real problems. The encasement of crises and their irresolution is the story and the tragic process of the return of depression. There is a good chance that sovereign debt will be the nemesis of denial and the answers to the side that will reshape the depression at the heart of the US economy.