and some $3,000,000,000,000 (trillion) and more dollars later, and some 400% engineered raising of the price of oil / energy, fully supported by policies in effect by the Oil Administration (not necessarily the same as the Bush Administration).... and some 82% estimated increase in personal bankruptcies, foreclosures, financial failures, pending mortgage foreclosures and family financial collapse(s), etc... comments in the news like: ..."the most impeachable administration in history"; ... (comments from convict Howard Dean, that the dirty tricks of this administration exceeded everything he / they did in the Nixon administraion; ... expectations of $4 gallon gasoline soon / summer '08 .... what more could you want these events (so as not to seem biased or expressing a political opinion, of which as a trader, I have none), instead of calling them facts, they are referred to as events,,, these events are what the markets are dealing with now, and during the end of Feb'08 and early Mar'08 are falling with no end in sight.... so, what's next?
. March 4, 2008 SouthAmerica: Reply to limitdown You asked me: âwhat's next?â Today the US dollar is trading around $ 1.53 = Euro 1.00 And very soon the US dollar will be trading above $ 1.60 = Euro 1.00 The question is: what is the point of no return for the US dollar â the point that is going to trigger massive selling and a US dollar meltdown â the biggest international financial crisis that the world have ever seen. When the Panic selling of the US dollar will start? That will be a Black Swan moment â and only after the event has been unfolding and running completely out of control that the analysts are going to try to come up with the reasons why the house of cards is collapsing. We donât have a past history to study and see if history is repeating itself â we never before in the history of international finance had a market that grew so fast as the âDERIVATIVESâ market grew in the first decade of the new millennium. And when this baby gets completely out of control and start melting â you know that the shit has hit the fan. The result is that the global economy it will descend into the first great depression of the new millennium. If you are smart start looking for a strategy to benefit from the coming financial collapse. I am sure that some people will make a ton of money during the implosion process. .
southamerica: You're implicit assumption that "derivatives" are the new margin are totally without base. In equity markets, at least, heavily traded derivatives fall under the categories of two types of instruments: futures and options on equity. Buying on margin is still permitted but it is practiced much less ubiquitously than it was during the "Roaring 20's". And no, don't try to pull shit as if the last 8 years was a booming decade. The S&P 500 is still down 10% from its low in 2000. Yes, the housing market was inflated but not everybody owns a home. In the United States, there are 160 million homes, of which 102 million are owned, and not rented. There are about 7.1 million subprime mortgages on the market. More or less 7% of the total. From the census bureau the median sales price of homes in the U.S. in January 2008 was $216,000. I assume homes bought with subprime mortgages are much less than that; assume about $150,000 (about 30% less). The total value of these homes could be guessed to be around $1,065,000,000,000. Say that's a trillion dollars. So if all of these houses lost all of their value, the U.S. market would see a trillion $'s down the drain. But this is unlikely; let's say they go down 30% in value, a fair estimate. That's about $300 billion in losses. A lot, right? Well how does it compare in relative terms, what does that come out to? The total value of homes in the U.S. is more or less $20,520,000,000,000. If subprime mortgages lose 30% of their value, it affects only about 1.5% of the total value of the U.S. home market. Not so big bad and scary anymore is it? Especially when Europeans and Asians are buying up those assets for pennies. Ok back to the derivatives. In the 20's, a little guy with $1000 would buy $2000 worth of stock. The transfer would be over and the little guy had $2000 worth of stock but only $1000 to back it up with. If it lost value he would see huge losses and the lending firm would incur a margin call, causing a run for capital. Net result: credit dries up. Derivatives are created out of thin air between a buyer and a seller. The difference with the above scenario is that after the deal is made, both the buyer and the seller are still in the trade. Let's say someone who owns stock wants to sell a call option on the open market. A buyer will appear and will buy it. Although there is huge leverage in these trades, any loss is negated by a profit held by the opposing party. The game is not zero-sum for individual parties but it is zero-sum for the entire market. Therefore there is no "credit" as there was in the 20s. So, your attempt to draw a comparison between this derivative "hype" and the margining hype of the 20s does not work. ~alphapirate
. thealphapirate: âYou're implicit assumption that "derivatives" are the new margin are totally without base.â ****** March 5, 2008 SouthAmerica: I was not comparing these types of financial instruments one versus the other. And I am saying that the derivatives market meltdown it is going to be the culprit of the new massive financial markets meltdown. How my assumption can be wrong about something that has not happened as yet? In 1929 people were gambling everything on the stock market and many people were buying stock on margin â the 10% margin requirement in 1929 allowed investors to buy stock worth $10 for every $1 invested of their own money and margin calls caused massive selling of stock and was a major contributor to the stock market crash of 1929. Regarding the Margin Call - In the 1920s, margin requirements were only 10 percent. In other words, the brokers required investors to put in very little of their own money to buy stock. When stock markets plummeted, the net value of the positions rapidly fell below the minimum margin requirements, forcing investors to sell their positions. This was one important factor contributing to the Stock Market Crash of 1929, which in turn contributed to the Great Depression of the 1930âs. ****** You should read again some information that I posted on this thread regarding the derivatives market as follows. February 18, 2008 SouthAmerica: I have been writing in the last few years about the subject of economic depressions and that we are due for another major economic depression like in the 1930âs and also that one of the major triggers for this new depression would be the collapse of the global DERIVATIVES market. http://www.elitetrader.com/vb/showthread.php?s=&threadid=117003&perpage=6&pagenumber=8 *** The key words here are: The international derivatives markets are in automatic pilot and they donât have any international government organization regulating that industry. âDuring the last recession in 2001 that market was in the range of $ 2 to $ 3 trillion dollars value compared with the almost $ 50 trillion US dollars in 2008. I want also to remind the reader that the $ 50 trillion US dollars credit default swap market represents just a little slice of the total Derivatives market. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007).â *** February 20, 2008 SouthAmerica: Reply to Eusdaiki http://www.elitetrader.com/vb/showthread.php?s=&threadid=117003&perpage=6&pagenumber=9 â¦Here is an important point to keep in mind: Wall Street has created a super-bubble (Derivatives market) in the credit default swap market that the market value amount of the contracts outstanding of about $ 50 trillion US dollars far exceeds the $ 6 trillion of the corporate bonds whose defaults the swaps were created to protect against. Now going back to what the above NYT article said: *** NYT: âTo the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem. Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise. For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the companyâs debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond. That is why the valuation of these contracts is of such concern to some participants. As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.â *** As the economy starts descending into a major recession and many corporations starts going bankrupt â the above example of Delphi start multiplying like rabbits inside of the US economy. Then some people are going to say that the Derivatives Market was able to survive the last major recession in 2001, and I would say, but the only problem is that the credit default swap market has grown 10 fold since the last recession, and if we have a major recession today, that market it will be tested for the first time â the $ 50 trillion US dollars question. During the last recession in 2001 that market was in the range of $ 2 to $ 3 trillion dollars value compared with the almost $ 50 trillion US dollars in 2008. I want also to remind the reader that the $ 50 trillion US dollars credit default swap market represents just a little slice of the Derivatives market. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007). You can check the Bank for International Settlements detail, in their semi-annual OTC derivatives market activity http://www.bis.org/publ/otc_hy0711.htm If you want to have a better understanding of the pieces that makes the Derivatives market then you can check the enclosed information regarding Derivatives: http://en.wikipedia.org/wiki/Deriva...e)#_note-afgh **************.. thealphapirate: âAnd no, don't try to pull shit as if the last 8 years was a booming decade. The S&P 500 is still down 10% from its low in 2000.â *** SouthAmerica: The market that you are talking about it is just a little fish inside of the Pacific Ocean. Quoting again from the New York Times article: âIn the Shadow of an Unregulated Marketâ â The value of the credit default insurance market is now much larger than the domestic stock market, mortgage securities market, and United States Treasuries market as follows: Credit Default Insurance Market = US$ 45.5 trillion. U.S. Stock Market = US$ 21.9 trillion. Mortgage Security Market = US$ 7.1 trillion. U.S. Treasuries Market = US$ 4.4 trillion. And also quoting from the Info from the Bank for International Settlements: I want also to remind the reader that the $ 50 trillion US dollars credit default swap market represents just a little slice of the Derivatives market. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007). .
. March 7, 2008 SouthAmerica: After all maybe John McCain has the solution and he knows what is best for the United States in the coming years. *** The Great Depression: A Brief Overview â¦Despite all the President's efforts and the courage of the American people, the Depression hung on until 1941, when America's involvement in the Second World War resulted in the drafting of young men into military service, and the creation of millions of jobs in defense and war industriesâ¦. http://www.todaysteacher.com/TheGreatDepressionWebQuest/BriefOverview.htm ******** Other info about the Great Depression. âMain Causes of the Great Depressionâ http://www.gusmorino.com/pag3/greatdepression/ ****** Quoting from: âThe Great Crash and the Great Slumpâ - By J. Bradford DeLong - University of California at Berkeley As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: "inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]... would, in the end, lead to a collapse worse than the one it was called in to remedy." For "recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead" http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html .
. March 10, 2008 SouthAmerica: Can the financial markets spiral out of control? Sure it can. Is trouble with margin calls a thing of the past? No. Is it possible for history repeat itself? Yes. ******* âCentral bankers cannot stop this contagionâ By Wolfgang Münchau Published: March 9, 2008 Financial Times (UK) Since the start of the global financial crisis last August, monetary policy has been remarkably ineffective. The US Federal Reserve has cut short-term rates by a cumulative 225 basis points since then. Yet, borrowing costs for US consumers and companies have actually gone up. While the European Central Bank has stoically kept short-term interest rates at 4 per cent, rates charged to consumers and companies have increased. â¦This credit crisis is first and foremost a financial solvency crisis. When you are insolvent, the rate of interest is irrelevant because no one will lend you money in any case. And if someone did, the interest rate would still be irrelevant, since you are not going to pay them back. If you face only a liquidity problem, the rate of interest matters a great deal, since it determines the price you pay to regain liquidity. This has not been a liquidity crisis, but a hugely contagious solvency crisis, affecting sector after sector, starting off with subprime mortgages, spilling over to the rest of the mortgage market, into municipal debt, corporate debt and many obscure sectors of the financial market. A good example of how contagion works in practice came last week when Carlyle Capital defaulted on a margin call from its banks. What is happening here is known in financial jargon as âhaircut contagionâ. In its September 2007 global stability report, the International Monetary Fund provided a useful hypothetical example of how a small fall in asset prices can easily wipe out an investor. Say, a fund invests $100 in a portfolio of risky securities. The margin requirement from the lender is 15 per cent. So on that basis, the fund borrows $85 from the bank. The rest is the fundâs equity. Assume the portfolio drops 5 per cent in value, and is now worth only $95. At that point, the fund faces a margin call. To meet it, it is forced to sell securities. When the bank decides to raise the margin requirement, or the âhaircutâ, more forced selling becomes necessary. At some point, the fundâs investors start to panic and get out. And the fund is forced to sell again. In this hypothetical IMF example, forced selling turned a portfolio of $100 into one of $36. ⦠But monetary policy itself cannot be an effective part of the solution of this credit crisis. This means that we are no longer living in the New Keynesian textbook world where the short-term interest rate is the variable through which central bankers can simultaneously control the economic cycle and maintain price stability in an optimal way. A monetary policy overreaction would not solve any existing crises, but would create new ones. Nominal interest rates would rise sharply, bond prices would crash and a short financial crisis would become a long one. Source: http://www.ft.com/cms/s/0/542027be-edde-11dc-a5c1-0000779fd2ac.html?nclick_check=1 ****** âCredit derivatives turmoil bitesâ By Robert Cookson and Joanna Chung in London and Michael,Mackenzie in New York Published: March 10 2008 Financial Times (UK) Turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system as a vicious cycle of forced selling drives risk premiums on company debt to new highs. The trend accelerated on both sides of the Atlantic last week as investors rushed to unwind highly leveraged positions in complex structured products. The cost of protecting US investment grade debt against default soared to a high of 188 basis points, from 80bp in January. In Europe, the cost of insuring the debt of the 125 investment-grade companies in the benchmark iTraxx Europe index surged to a new high of 156bp, before closing at 146bp on Friday. A move above 150bp would spark the unwinding of structured trades, according to BNP Paribas. Institutions that lapped up credit risk products in recent years - many financing their purchases through borrowing - are scrambling to reduce their exposure following heavy losses, traders say. But many investors fear conditions could worsen as hedge funds, banks and other financial institutions come under pressure to cut their losses before conditions deteriorate further. Liquidating structured credit instruments requires buying large amounts of protection using credit default swaps. This, in turn, drives the cost of protection higher, potentially triggering a chain reaction. âThere is potential for some wild and possibly inexplicable price movements as the unwinds get bigger,â said Mehernosh Engineer, credit strategist at BNP. The markets are so illiquid that a few trades can lead to sharp movements, producing violent price swings and knock-on effects. Tim Bond, head of global asset allocation at Barclays Capital, said: âItâs inflicting heavy losses on the banking system, eroding their capital and reducing their ability to lend. The spread widening is so severe, youâre seeing a rise in borrowing rates across the board for everybody except top-quality governments. Itâs affecting both the price and availability of credit.â Some structured credit vehicles have in-built triggers that force them to be liquidated. Bank of America estimates that if the cost of US investment grade credit insurance rises above 200bp, the unwinding of structures could trigger a jump towards 220bp. Jim Sarni, portfolio manager at Payden & Rygel, an investment management firm, said: âThe market is very concerned about counterparty risk and how stable positions are as they are marked to market as prices keep falling.â Suki Mann, credit strategist at Société Générale, said companies and consumers were also suffering because of reduced lending as banks hoarded liquidity. Source: http://www.ft.com/cms/s/af1e1c18-ee04-11dc-a5c1-0000779fd2ac.html .
. March 15, 2008 SouthAmerica: The downward spiraling of the US financial system it has started spinning completely out of control â Itâs Panic time - and here is what the Fed is trying to do to slowdown the implosion process. This is how a country descends into a Great Depression â it is a domino effect that happens one step at the time. The Federal Reserve âMantraâ for the years 2007, 2008, and beyond is: "Throwing good money after bad" The Feds answer to how to slowdown the US financial markets implosion process and here are some articles that shows that the US financial system it is going over the edge of the abyss: ******** âBehind Bear Stearns Rescue Plan, a Wall St. Domino Theoryâ By JENNY ANDERSON and VIKAS BAJAJ Published: March 15, 2008 The New York Times â Front page story The Federal Reserveâs unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system. Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism. The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted. â¦âThe problem is the financing of the hedge fund industry is very concentrated and very brittle,â Mr. Sloan said. âIf they go under, you will have thousands of funds frozen out,â he said, adding that everyone might then have to wait for a court to name a receiver before business could resume. Hedge funds rely on Wall Street for a range of services from the humdrum, like holding their securities, to the critical, like providing loans they use to increase their bets. As Wall Street has buckled under multibillion-dollar write-downs, the firms have cut financing to hedge funds and asked the funds to put up more assets to back their borrowing, forcing managers to sell en masse. This has caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the powerful private equity firm Carlyle Group; Peloton Partners, a hedge fund founded by former Goldman Sachs traders; and Drake Capital, a blue-chip fund that has been struggling. â¦But the bigger worry for hedge funds and others that do business with Bear Stearns is whether the firm will be able to honor its trades. Of particular concern are the insurance contracts known as credit default swaps in which one party agrees to guarantee interest and principal payments in case an issuer defaults on its bonds. Investors in such contracts with Bear Stearns are closely studying whether they can get out of them or have them transferred to a more stable firm. Compounding the problem, some big investment banks this week stopped accepting trades that would expose them to Bear Stearns. Money market funds also reduced their holdings of short-term debt issued by Bear, according to industry officials. âYou get to where people canât trade with each other,â said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. âIf the Fed hadnât acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial systemâ¦.â Source: http://www.nytimes.com/2008/03/15/business/15risk.html?_r=1&hp&oref=slogin ******* âRun on Big Wall St. Bank Spurs Rescue Backed by U.S.â By LANDON THOMAS Jr. Published: March 15, 2008 The New York Times â Front page story Just three days ago, the head of Bear Stearns, the beleaguered investment bank, sought to assure Wall Street that his firm was safe. But those assurances were blown away in what amounted to a bank run at Bear Stearns, prompting JPMorgan Chase and the Federal Reserve Bank of New York to step in on Friday with a financial rescue package intended to keep the firm afloat. The move underscores the extreme stresses that the credit crisis has imposed on the financial system and raises the once-unthinkable prospect that major Wall Street firms might fail. The developments may only postpone the eventual sale of all or part of Bear Stearns, which has had crippling losses on mortgage-linked investments. To keep the 85-year-old firm solvent, JPMorgan, backed by the New York Fed, extended a secured line of credit that gives Bear Stearns at least 28 days to shore up its finances or, more likely, to find a buyer. â¦The size and terms of the credit line were not disclosed. JPMorgan will borrow the money from the Fed and lend it to Bear Stearns, and the Fed will ultimately bear the risk of the loan. â¦The Fedâs intervention highlights the problems regulators face as they contemplate the prospect that investment banks, saddled with toxic securities tied to subprime mortgages, are losing the trust of their lenders and clients â the kiss of death on Wall Street, where confidence has always been the most precious asset of all. Traditionally regulators have helped commercial banks in financial panics, but not investment banks, which do not hold customer deposits. But the 1999 repeal of the Glass-Steagall Act, the Depression-era law that separated investment banks and commercial banks, led to consolidation within the financial industry that has made such distinctions harder to make. â¦In a conference call on Friday, Mr. Schwartz, who succeeded James E. Cayne as chief executive early this year, sounded frustrated as he described the run on Bear Stearns over the previous 24 hours, and raised the possibility that the firmâs days as an independent bank were numbered. â¦The troubles at Bear Stearns have come quickly and savagely and hurt some of the putatively smartest money in finance. From Joseph Lewis, the Bermuda-based billionaire who bought $1 billion of Bear Stearns shares last summer, when the stock was trading at $100 and above, to William Miller, the vaunted value investor at Legg Mason, those who have wagered on a turnaround at Bear Stearns are many. â¦The demise of the hedge funds began a slow but persistent loss of market confidence in the bank. Such an erosion can be devastating for any investment bank, especially one like Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows more than 30 times the value of its $11 billion equity base. âThe public has never fully understood how leveraged these institutions are,â said Samuel L. Hayes, a professor of investment banking at Harvard Business School. âBut the market makers understand this inherent risk. This is a run on the bank, just like Long-Term Capital Management, Kidder and Drexel Burnham.â Source: http://www.nytimes.com/2008/03/15/business/15bear.html?hp . ***** âBetting the Bankâ By PAUL KRUGMAN Published: March 14, 2008 The New York Times â¦Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paperâs suggestions into effect. Unfortunately, however, the Bernanke Fedâs actions â even though theyâre unprecedented in their scope â probably wonât be enough to halt the economyâs downward spiral. â¦These days, itâs rare to get through a week without hearing about another financial disaster. Some of this is unavoidable: thereâs nothing Mr. Bernanke can or should do to prevent people who bet on ever-rising house prices from losing money. But the Fed is trying to contain the damage from the collapse of the housing bubble, keeping it from causing a deep recession or wrecking financial markets that had nothing to do with housing. So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds. Unfortunately, the policy isnât having much effect on the things that matter. Interest rates on government bonds are down â but financial chaos has made banks unwilling to take risks, and itâs getting harder, not easier, for businesses to borrow money. â¦Officially, the Fed wonât be buying mortgage-backed securities outright: itâs only accepting them as collateral in return for loans. But itâs definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes. Still, thatâs not what has me worried. Iâm more concerned that despite the extraordinary scale of Mr. Bernankeâs action â to my knowledge, no advanced-countryâs central bank has ever exposed itself to this much market risk â the Fed still wonât manage to get a grip on the economy. You see, $400 billion sounds like a lot, but itâs still small compared with the problem. â¦What if this initiative fails? Iâm sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but thereâs only so much the Fed â whose resources are limited, and whose mandate doesnât extend to rescuing the whole financial system â can do when faced with what looks increasingly like one of historyâs great financial crises. â¦I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what itâs doing to an angry public. Source: http://www.nytimes.com/2008/03/14/opinion/14krugman.html .
Hello Southamerica. This is my first post to you. I enjoy reading your thoughtful posts. I have pulled up a chart of BSC. The decline is orderly. We have survived 1929. We have survived LTCM. We have survived Drexel. We have survived Kidder. What makes you think that we will not survive BSC? Some, if not many have seen the technical weakness in this stock. People are making money. Business cycles are, and will be, a fact of life as long as we use a fractional reserve banking system. Can you please tell me what the big deal is? Think of me as the forest gump of finance. I am not that smart. Break it down for me. Best Regards Oddi
To SouthAmerica: i have a feeling that most people find it difficult to relate to your conclusions because they simply cannot conceive of the paradigm shift implied in the process between Here and There. My own sense is that we will not see the kind of persistent economic paralysis that characterized the 1930's. However, I think we are clearly on a path that will strongly echo some of the financial processes that kicked off the depression. And I even think that, retroactively, maybe a decade from now, economists will look back and consider this to be a period that qualitatively bears no relationship to anything we have called a recession in the post-war period. But I wanted to put forth what I think acts as the conceptual barrier for most people who scoff at the idea that a financial-collapse inspired downturn with drastic consequences is plausible today. * Keep in mind that I think some of the following is going to take place, but not to the extent implied in the argument. It's just a thought exercise to relate to the process, and to demonstrate that modern financial 'technology' is not a barrier to that process. The heuristic begins by understanding that there are presumptions and assumptions that are so entirely unquestioned as to be invisible (this is particularly true now that anyone who was an adult in 1929 is deceased). And the whole framework of our financial system rests on their invisibility. Itâs a kind of absolute faith. Those assumtions support our financial world simply because we all agree, tacitly, about certain conceptual relationships. But it's particularly important to note that we don't decide, as rational agents, to believe in those relationships. They are taken for granted facts of our existence. They are invisible the way water is invisible to a fish. Fish donât know about water. They just know that they can move over here by going like that. And they can move over there by going like this. And they know about spacial relationships and locomotor possibilities. But they donât have a damn clue about water. Until you take them out and lay them on the dock. Until that moment, Water is invisible. There is a path between here and there, and it consists of a step-by-step process by which our unquestioned premises suddenly become visible, and then questionable. Concepts like investment, and value, and opportunity go right out the window if you suddenly find yourself surrounded by a quaking mob of panic that isnât sure whether stocks will go up or down, and doesnât care. All they want is to have security in the fact that their money is in front of them, and in some form that wonât disappear when the next bank goes under. And that single-minded desire is precisely the downfall of that next bank to go. Under such conditions, opportunists and value-seekers - who act in a manner that was perfectly rational under prior conditions - are wiped out by one cascade after another. And their punishment sits like a head on a spike for all to see, and learn from. And what can the fed do in a world like that? Credit? That rests on the same foundations as the rest of it. We take it on faith that an agreement to furnish capital has meaning. If a whole mountain of such agreements cascade into meaninglessness, the assumption becomes suddenly Visible. And we take one big step on the journey between stability and chaos.
So, given all of the above, why then do I reject your ultimate conclusion: Because information liquidity is the most defining distinction between the inability, in the 1930's, to recover and recapitalize faith and constructive economic behavior, and our present capacity. During that period, uncertainty and opacity were critical enablers in the persistence of that stagnation. It was in large part, capital isolation. But the ability to communicate and collaborate today, from anywhere in the world, a billion times per second, places people everywhere in too much potential efficiency to provide for persistent disinvestment. The fundamental difference is our redundantly robust interactivity. In short, if 1929 had occurred in an environment laden with supercomputing power and a global information infrastructure, it would not have taken 12 years to reinvigorate.