I've been watching a slow motion implosion since last August that began with the collapse of two Bear Stearns hedge funds. We're definitely on track for something like the Great Depression, only long and financially painful. I think we get knocked back to a 1940 standard of living very shortly and we're going to have to fight to hang on to that in the face of peak oil. We here in the U.S. associate the year 1929 with the beginning of the Great Depression but the roots of it really took hold in 1931 with the collapse of the Austrian banking system. Today we face some definitely scary parallels with what is happening in Iceland. Little Iceland, population 315,000, could knock the United States, a thousand times larger, right over, should their banking system let go. And it appears it might.
First things first, if you aren't a financial guru you will need a basic understanding of the word "leverage". A hedge fund raises a billion dollars, buys some dodgy, subprime mortgage bundle, then off to the bank they go. The subprime mortgage bundles aren't sold all that often so instead of a real market price they have been "marked to model". This is also called "marked to make believe". The hedge fund tells the bank "I got some good, mortgage payin' Americans here and I'd like to borrow ... say ... twenty billion." Sounds crazy, but the banks do it, and then this money is used to fold, spindle, and mutilate businesses that actually do stuff. Nuts, isn't it?
Iceland has 315,000 people and their GDP is about $15 billion - about $47,000 per resident. Their banks were sensible in 2001, with just 4% of their loans being foreign debt. Fast forward to today and what do we find? Kaupthing had assets worth $63.6 billion, Glitnir $47.4 bilion and Landsbanski $49.1 billion.
Add those all up. $160 billion. Almost eleven times their GDP and the smallest is still triple their GDP. If even one of these goes under they can't bail them out. If even one of them goes under it will take down the other two due to the coupling between the banks as they share such a small economy.
So ... Iceland alone has as much trouble as is chronicled on The Bank Implode-o-meter and they're just one tiny country. We've already seen what Bear Stearns running right up to the edge got us - a de facto nationalization of any bad bank debt.
The world's financial system is under strain. Let me convert that into naval terms for you. The world's financial system is in the same position as a world war II era submarine with dead batteries stuck 400' below the surface. It's cold. It's dark. There is no power left to blow the ballast and thusly no way to climb back up to the sunlit surface. All of the vessel creaks and groans under strains it was never built to withstand; prayers of those aboard provide 22% of its structural material.
The Bear Stearns hedge fund collapse last August was the first stream of high pressure water penetrating the hull. The collapse of the entire Bear Stearns operation a few weeks ago was a loud *BANG* from the rear of the boat followed by the popping of everyone's eardrums as the pressure began to increase rapidly.
If this were a World War II submarine movie we'd switch to a view of the sonarman on a nearby destroyer listening to the crunching of collapsing bulkheads as the boat goes down with all hands. There won't be anyone in this role this time; the massive systemic fraud perpetrated with the shadow banking system of derivative issuers and holders is everywhere. We just don't have anywhere to bail this mess to even if we had the political will to do so.
So ... food riots are already happening in Haiti, Egypt, Kuwait, India(nuclear), Pakistan(nuclear), and twenty eight other countries named by the World Bank's president are considered in danger, including places like Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. This is happening before the above described bulkhead collapsing really gets rolling. The last depression got us the Sino-Japanese war, the Spanish civil war, the Italian adventure in Ethiopia, and it all rolled up into World War II. This will be worse, with nuclear weapons propagating and the major oil producing region of the world just inches away from boiling over like the Balkans did at the start of World War I.
There aren't words in English to describe how ugly this is going to get and it will be here well ahead of the 2008 election. One major bank implosion, one major hurricane, one major crop failure like the one from the uberscary ug99 wheat rust that is spreading rapidly, and we plunge into chaos. Imagine every large urban area in the United States looking like Detroit on Halloween night back in the 1970s, or Los Angeles after the Rodney King verdict.
You didn't really think all of that Homeland Security stuff is hand wringing over Muslims, did you? That has always been aimed squarely at you and me for the day when our state fails our nation. We can't escape it and I'm glad it's going to get started on Bush's watch so we have a hope of repudiating the Reaganesque nonsense that has got us here these last thirty years.
Poster Note: Not sure if it's correct, but it's interesting.
