Are we headed into another financial crisis?
With the recent downfall of the share prices of both Deutsche Bank and Credit Suisse, it looks like another Global Financial Crisis could stem up.
Deutsche Bank and Credit Suisse are tanking more right now than during the financial crisis of 2009.
The collapse in Credit Suisse's share price is of great concern. From $14.90 in Feb 2021, to $3.90 currently.
And with P/B=0.22, markets are saying it's insolvent and probably bust. 2008 moment soon?
Probably, a systemic risk bank.
But where did it start?
Big banks went international in the 1960s and, once again, credit risk profiles were created based on the country risk of a bank's international lending activity. A system geared toward stability rather than growth.
What changed? The end of the Gold standard in 1971 led us directly to the mess we are in. Certainly, it removed a fairly significant discipline from the creation of imaginary money.
That discipline was restored, to a degree, by the Volcker interest rate squeeze in the early 1980s, but once that was done and the recession it produced, the Reagan supply-side economics and the Clinton boom created permanent gov't deficits.
Years of zero interest rates have pumped far too much imaginary money into the world's financial system. Normal course banking is lending money against security in the form of real assets valued fairly. Arguably, that model was pretty much over when the banks were bailed out in 2008.
Bank shares are traded and, back in the day, careful analysts would rate banks using metrics which included broad evaluations of their credit risk profile. In broad terms, who were they lending to, and which sectors of the economy?
Since governments are spending money they don't have and that money drives real (and not so real) asset prices up so that banks can lend imaginary money based on imaginary asset values.
The crisis:
The trouble is that "events" can destroy these make-believe asset values literally overnight. Non-paying Chinese condo owners, backfiring anti-Russia sanctions, and the collapse of the green energy illusion in Europe. All of a sudden, there is reality. All of which have huge exposure to Credit Suisse and Deutsche Bank.
Now, the question that pertains is can these be bailed out?
One of the unspoken assumptions about the make-believe world of big banking is that the larger players "will not be allowed to fail". DB/CS, if they are in trouble, will be bailed out.
But will they?
Right at the moment, the capacity of European governments to bail out banks this big has to be questioned. The energy shortage and pricing all over Europe are causing factories to close. People have no work. And that is cascading.
When GDP falls and unemployment rises the go-to Keynesian response is to borrow a lot of money and "get things going" again. Which will put pressure on the money markets. Adding the costs of big bank bailouts will add to that pressure. This is already at a time when economies are battling hard with inflation.
Visual Patterns?
Both are "too big to fail" but are they also "too big to bail"? Whether another 2008 reappears, we will have to wait and watch.
Until next time!
Cheers!
End-Week Wisdom:
"If you bought the S&P 500 at a P/E of 5.3x in 1917, and sold it in 1999 at a P/E of 34x, your annual return would have been 11.6%. Only 2.3% p.a. came from the massive increase in P/E. The rest of your return came from the companies’ earnings and reinvestments." - Terry Smith
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