How higher interest rates could trigger another 2008-type event
by Graham Summers
Phoenix Capital Research
Originally posted February 15, 2011
HIGHER INTEREST RATES ARE COMING and coming fast. The Fed has spent trillions trying to lower interest rates (more on this in a moment), and it’s now officially lost control of the long-end of the Treasury market. This will have ENORMOUS implications for the US housing market and financial system. Housing prices will be collapsing in the coming months as interest rates soar. We could also very well see another 2008-type event (a collapse of the US Financial System) as well. Why?
Derivatives. In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size. In contrast, the interest-rate based derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at hits peak.
At this size you only need a very small percentage of these derivatives to be “at risk” (meaning real money is bet on them), say 5% to get $10 trillion in potential losses. To put that number into perspective, the entire WORLD STOCK MARKET is only $36 trillion in size.
See the potential risk here?
To say that the US financial system is in danger would be a HUGE understatement. It is the derivatives market, NOT the housing market that has the Fed concerned.
Sure, the Fed claims it’s engaging in QE and other tactics to help housing, but this is just a political move aimed at quelling the US public’s growing outrage. You can tell this because of the fact that interest rates have in fact JUMPED every time the Fed engaged in QE:
There is no way any human being could claim that QE is about helping housing prices. It is aimed entirely at funneling TRILLIONS of Dollars to the Wall Street banks. Why?
Because these are the banks with the GREATEST derivatives exposure.
Trust me, Ben Bernanke is well aware of this situation. Even his predecessor, Alan Greenspan, knew about it as far back as 1999. At that time he told Brooksley Borne that attempting to rein in the derivatives market and forcing it to pass through a public clearinghouse would “implode” the market.
Remember, QE is all about the Fed buying Treasuries FROM the Wall Street banks. In this sense it’s nothing more than an effort to remove assets from their balance sheets in exchange for cash. And that’s exactly what it’s supposed to be: an attempt to shore up the Wall Street banks MASSIVE derivative exposure.
This is why the Fed keeps launching more and more QE programs despite the clear fact that it has failed to accomplish any of its publicly stated goals: boosting employment, lowering interest rates, etc. Bernanke knows if he doesn’t keep the billions in weekly capital infusions to the Wall Street banks that the entire system will come crashing down.
Be aware, the issues that caused 2008 are still in play. If Bernanke loses control of interest rates on the short and long end its GAME. SET. MATCH. for the US Financial System.
Written by aurick
17/02/2011 at 1:12 pm
Tagged with Alan Greenspan, Ben Bernanke, Brooksley Borne, derivatives, derivatives market, Housing Market, Housing Prices, monetary policy, QE2, Quantitative easing, sovereign debt, sovereign default, Wall Street