Reading the tea leaves: signs of coming crisis

There have been many occasions over the past few years where I thought (and many others thought) that this could break the bank again, and put us firmly back into a financial crisis like 2008. To clear my head I thought about what I look for in the news to keep me on my toes about the potential for severe negative short term scenarios. Let me posit a few main thinking points about the current ongoing slow-mo crisis.

  1. We all expect there to be a moment in the future when we see a repeat of the crisis events of 2008.
  2. We don’t know precisely what will set it off – it may be economic political events in e.g. the current rage – Cyprus… or Greece, or even China; it might be an epidemic, another earthquake or something we cannot foresee. That is the nature of Black Swans.
  3. At least one of the causes will be an attempt to seize collateral of some type by a big bank against a smaller bank. Yves Smith has made the argument that at least one proximate cause of the Financial Crisis of 2008 was the seizure of collateral by JP Morgan from Lehman Bros. This froze the inter-bank flows of capital as no one was willing to lend on a short term to any other player for any collateral.
  4. The consequences are likely to be the freezing of capital for a longer period than the last time around; the contagion will likely be wider and deeper.
  5. Elites in the political sphere are doing nothing to put in firewalls and prudent regulation to forestall a meltdown. To the contrary the political policy agenda is being driven by elites in the FIRE sector.
  6. Financial elites are vying for position, trying to be first served in a collateral grab scenario.
  7. The financial assets not based on collateral will need to be written down to zero. “Loans that cannot be repaid will not be repaid.” As a corollary all “real” assets will become more valuable and be – a likely scenario- targeted to be seized by foreclosure, bankruptcy and other means of liquidation. This seizure will proceed to the benefit of elite players at the detriment of the people in general, and the less sophisticated financial players (who are known as marks, zeros, Muppets…)
  8. While some financial elites will do well, most will not; most of the population will not either. This leads to political change in democracies, rise in social unrest, demonstrations, strikes, political violence. That will in its turn raise to call for forceful state response. To the point that in some states it may turn out revolutionary when the soldiers realize that they are citizens and should perhaps think twice about doing the dirty work of the elite.
  9. These things are not causal in a strict temporal order, e.g. social unrest may flare in some places before assets freeze.
  10. Political parties who are associated with creating the mess will be pushed out of office in democracies. Demagogues may ascend to power, like Hitler did in the 1930’s. I expect to see a rise in nationalistic, racist, xenophobic rhetoric – if not clear policies in that direction.

Keep watching the signs of the times. Comments welcome.

Crossposted at nakedcapitalism

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